Nios Accountancy Full Book

Secondary Course
224 - Accountancy
Course Coordinator
Dr. Piyush Prasad
NATIONAL INSTITUTE OF OPEN SCHOOLING

(An autonomous organisation under MHRD, Govt. of India)
A-24-25, Institutional Area, Sector-62, NOIDA-201309 (U.P.)

Website: www.nios.ac.in, Toll Free No. 18001809393
Printed on 80 GSM Paper with NIOS Watermark.
National Institute of Open Schooling

May, 2015 (3,000 Copies)
Published by the Secretary, National Institute of Open Schooling, A-24-25, Institutional Area, NH-24,
Sec. 62, Noida-201309, and printed at M/s Aravali Printers & Publishers Pvt. Ltd., W-30, Okhla Industrial Area,
Phase-II, New Delhi-110020.
ADVISORY COMMITTEE
Chairman Dr. Kuldeep Agarwal Mrs. Gopa Biswas Dr. Sonia Behl
NIOS, Noida Director (Academic) Jt. Director (Academic) Asst. Director (Academic)
NIOS, Noida NIOS, Noida NIOS, Noida
CURRICULUM COMMITTEE
Dr. G.P. Agarwal Prof. K. Ravishankar Sh. Charan Singh Savita
Chairperson Professor, School of Management Studies Associate Professor (Retd.)
Principal, S.L. College IGNOU Shyam Lal College
University of Delhi, Delhi New Delhi University of Delhi, Delhi
Dr. D.K. Pandeya Dr. R.P. Tulsian Dr. R.K. Gupta
Associate Professor Associate Professor Associate Professor
B.R. Ambedkar College Shaheed Bhagat Singh College (Evening) PGDAV College
University of Delhi, Delhi University of Delhi, Delhi University of Delhi, Delhi
Dr. Naseeb Ahmad Dr. B.P. Sahoo Dr. O.P. Mahindra
Asst. Professor Asst. Professor Asst. Professor
Jamia Millia Islamia Khalsa College Seth G.L. Bihani S.D (PG) College
New Delhi University of Delhi, Delhi Rajasthan
Sh. S.M. Singh Sh. Sanjeev Kumar Sh. S.K. Sharma
PGT. Govt. School Lecturer Commerce PGT, Govt. School
Patna (Bihar) Govt. Sarvodaya Bal Vidyalaya Dilshad Garden, Delhi
Krishna Nagar, Delhi
SUBJECT TEAM
Dr. G.P. Agarwal Dr. Sunil Kr. Gupta Dr. D.K. Pandeya Dr. R.P. Tulsian
Principal, S.L. College Associate Profesor Associate Professor Associate Professor
University of Delhi, Delhi SOMS, IGNOU B.R. Ambedkar College Saheed Bhagat Singh College (Eve.)
New Delhi University of Delhi, Delhi University of Delhi, Delhi
Sh. Charan Singh Savita Sh. S.K. Sharma Dr. Ajay Garg Dr. Neha Aggarwal
Associate Professor (Retd.) PGT, Govt. School PG DAV Evening College Financial Expert
Shyam Lal College Dilshad Garden, Delhi University of Delhi, Delhi GAIL (India) Ltd.
University of Delhi, Delhi Vijaypur, M.P
Dr. A.K. Singh Sh. S.K. Bansal Dr. Piyush Prasad
Asst. Professor Lecturer Commerce (Retd.) Academic Officer
Sh. Bhagat Singh College, Commercial College, Daryaganj NIOS, Noida
University of Delhi, Delhi New Delhi
EDITORS
Sh. S.S. Sehrawat Sh. S.K. Bansal Sh. L.R. Pathak Sh. Sanjeev Kumar
Deputy Commisioner (Retd.) Lecturere Commerce (Retd.) Education Officer (Retd.) Lecturer Commerce
Kendrya Vidyalaya Sangathan Commercial College, Daryaganj NCT, New Delhi Govt. Sarvodaya Bal Vidyalaya
New Delhi New Delhi Krishna Nagar, Delhi
GRAPHICS, COVER DESIGN AND DTP

Sh. Mahesh Sharma M.K Computers
Graphic Artist Shop No. 19, DDA Market
NIOS, New Delhi Bhera Enclave, Paschim Vihar
New Delhi - 110087
Chairmans Message
Dear learners
As the needs of the society in general, and some groups in particular, keep on changing
with time, the methods and techniques required for fulfilling those aspirations also
have to be modified accordingly. Education is an instrument of change. The right type
of education at right time can bring about positivity in the outlook of society, attitudinal
changes to face the new/fresh challenges and the courage to face difficult situations.
This can be very effectively achieved by the curriculum renewal and by introducing
new subjects at regular intervals of time. A static curriculum serves no other purpose
than a mere manual of instruments for teaching in which, unless the water is changed
at regular intervals of time, the water can not be put to any use. Rather, it starts stinking
giving a foul and obnoxious smell.
Textual material production is an integral and essential part of curriculum

development. Through it, the goals of teaching a particular subject are achieved
and it teaches the techniques, rather than employing old and traditional methods
which may not suit the situation at all.
For this purpose only, educationists from all over the country come together at
regular intervals to deliberate on the issues of changes needed and required. As an
outcome of such deliberations, the National Curriculum Framework (NCF) came
out, which spells out in detail the type of education desirable/needed at various
levels of education primary, elementary, secondary or senior secondary.
Keeping this framework and other national and societal concerns in mind, we have
introduced few new subjects at the secondary level, making them current and need
based. We have also taken special care to make the learning material user friendly,
interesting and attractive for you.
I would like to thank all the eminent persons involved in making this material
interesting and relevant to your needs. I hope you find it appealing and absorbing.
On behalf of National Institute of Open Schooling, I wish you all a bright and
successful future.
Chairman
(National Institute of Open Schooling)
A Note From the Director
Dear Learner,
The Academic Department at the National Institute of Open Schooling tries to bring
you new programmes every now and then in accordance with your needs and
requirements. Recently, we undertook the responsibility of revising curriculum in
all the subjects at the secondary level as well as to introduce new subjects as per
need of learners. In order to bring to you a curriculum which is at par with other
boards in the country, we consulted the curriculum in different subjects at the CBSE,
the Boards of Secondary Education of Uttar Pradesh, Maharashtra, Madhya Pradesh,
Goa, Jammu and Kashmir, West Bengal, etc. The National Curriculum Framework
developed by the National Council for Educational Research and Training was kept
as a reference point. After making a comprehensive comparative study, we found
that our curriculum was functional, related to life situations and simple. The task
now was to make it more effective and useful for you. We invited leading educationists
of the country and under their guidance, have been able to revise and update the
curriculum.
At the same time, we have covered all relevant things and have tried to make the
learning material attractive and appealing for you.
I hope you will find this material interesting and exciting. Any suggestions for further
improvement are welcome.
Let me wish you all a happy and successful future.
(Dr Kuldeep Agarwal)

Director (Academic)
A Word With You
Dear Learner,
I am happy that you have chosen Accountancy as one of the subjects at Secondary level. Welcome
to the course in Accountancy.
You know that all of us have some direct and indirect link with various accounting activities. The
environment around us has influenced our lives in many ways. In this context, it is our attempt to
develop awareness among the learners about business and accounting, its wide network and also
about its ever-changing nature. Introduction to Accounting, Journal, Subsidiary Books, Ledger, Trial
Balance, Depreciation and Preparation of Financial Statements with the use of computer in Accounting
are covered in this course. It would also give you some idea about how Accountancy provides
career opportunities.
This course has six modules, namely Introduction and Basic Concepts, Journal and Other Subsidiary
Books, Ledger and Trial Balance, Depreciation, Provisions and Reserves, Preparation of Financial
Statements, Computer in Accounting. Each lesson of this subject has been designed keeping in view
the requirements of the Self Learners like you through Open and Distance Mode. With a text
written in a very simple language, supplemented by pictures/figures, illustrations to make it clear at
a glance. All these will include Intext Questions which will appear after every section of the lesson.
They will normally be very short answer type questions consisting objective type, true and false,
match the colomn, fill in the blanks and Multiple Choice Questions will help you to understand the
extent to which you have learnt the section. You will find the key to these questions at the end of the
lesson. If you are able to answer the questions, then you can proceed further otherwise you should
learn the section again.
I hope you will find the lessons interesting and would be able to apply your knowledge in the real life
situations. So, read, all these lessons carefully and prepare well for examinations.
The examination in Accountancy will consist of one paper which carries 100 marks. For your
practice a sample question paper has been given at the end of the book. This is followed by detailed
marking scheme, which will tell you how your answers will be evaluated. Try to answer all the
questions and compare those with the answer given in the marking scheme.
Do not hesitate to write to me, in case you have any difficulty in your studies.
Happy Studies
Wishing you success.
(Dr. Piyush Prasad)

Academic Officer
National Institute of Open Schooling
alkaranipiyush@rediffmail.com
How to use the Study Material
Congratulation! You have accepted the challenge to be a self-learner. NIOS is with you at
every step and has developed the material in Accountancy with the help of a team of
experts, keeping you in mind. A format supporting independent learning has been followed.
You can take the best out of this material if you follow the instructions given. The relevant
icons used in the material will guide you.
Content : Total content has been divided into sections and subsections.
Section leads you from one content element to another and subsections
help in comprehension of the concepts in the content elements.
Notes : Each page carries empty space in the side margins, for you to
write important points or make notes.
Objectives : These are statements of outcomes of learning expected

from you after studying the lesson. You are expected to achieve them,
do read them and check if you have achieved.
Intext Questions : Very short answer self check questions are asked
after every section, the answers to which are given at the end of the
lesson. These will help you to check your progress. Do solve them.
Succesful completion will allow you to decide whether to proceed further
or go back and learn again.
What You Have Learnt : This is the summary of the main points of the
lesson. It will help in recapitulation and revision. You are welcome to
add your own points to it also.
Terminal Questions : These are long and short questions that provide
an opportunity to practice for a clear understanding of the whole topic.
Key to Intext Questions : These will help you to know how correctly
you have answered the intext questions.

Contents
Module 1 : Introduction and Basic Concepts
Lesson 1. Introduction to Accounting ............................................................................. 3
Lesson 2. Accounting Concepts and Conventions ........................................................ 15
Lesson 3. Accounting Terms........................................................................................... 27
Module 2 : Journal and Other Subsidiary Books
Lesson 4. Accounting Equation ..................................................................................... 38
Lesson 5. Double Entry System ..................................................................................... 51
Lesson 6. Journal ........................................................................................................... 73
Lesson 7. Cash Book ...................................................................................................... 89
Lesson 8. Bank Reconciliation Statement .................................................................. 110
Lesson 9. Purchases and Sales Book ........................................................................... 130
Module 3 : Ledger and Trial Balance
Lesson 10. Ledger ........................................................................................................... 150
Lesson 11. Trial Balance and Accounting Errors ........................................................ 171
Module 4 : Depreciation, Provisions and Reserves
Lesson 12. Depreciation ................................................................................................. 188
Lesson 13. Provisions and Reserves ............................................................................... 207
Module 5 : Preparation of Financial Statements
Lesson 14. Financial Statements (Without Adjustments) ............................................. 221
Lesson 15. Financial Statements (With Adjustments) .................................................. 236
Module 6 : Computer in Accounting
Lesson 16. Computers in Accounting ............................................................................ 253
Lesson 17. Introduction to Tally .................................................................................... 264
Curriculum ................................................................................................ i - v
Sample Question Paper ............................................................................ vi - xi
Marking Scheme ..................................................................................... xii - xx

Several projects have been implemented by the NIOS to tap the potential of Information and
Communication Technology (ICT) for promoting of Open and Distance Learning (ODL) system.
The Ni-On project of NIOS won the National Award for e-governance and Department of Information
and Technology, Govt. of India. In further recognition of its On-line initiatives and best ICT practices,
the NIOS received the following awards:
NIOS WINS National Award for e-Governance 2008-09

Silver icon for Excellence in Government Process Re-engineering, Instituted
by Government of India Department of Administrative Reforms and Public
Grievances & Department of Information Technology.
NIOS receives NCPEDP MPHASIS Universal Design Awards 2012

National Institute of Open Schooling (NIOS) has been awarded
THE NCPEDP - MPHASIS UNIVERSAL DESIGN AWARDS
2012 instituted by National Centre for Promotion of Employment
for Disabled People. The award was given by Sh. Mukul
Wasnik, Honble Minister for Social Justice and
Empowerment, Govt. of India on 14th August, 2012. NIOS
has been selected for its remarkable work done for the learners
with disabilities through ICT by making its web portal
www.nios.ac.in completely accessible for such learners.
The Manthan Award South Asia & Asia Pacific 2012

The Manthan Award South Asia & Asia Pacific 2012 to recognize
the best ICT practices in e-Content and Creativity instituted by
Digital Empowerment Foundation in partnership with World
Summit Award, Department of Information Technology, Govt. of
India, and various other stakeholders like civil society members,
media and other similar organisations engaged in promoting digital
content inclusiveness in the whole of South Asian & Asia Pacific
nation states for development. The award was conferred during
9th Manthan Award Gala South Asia & Asia Pacific 2012 at India Habitat Centre on 1st Dec.
2012.
MODULE - I
Maximum Marks Hours of Studies
20 48
Introduction and Basic Concepts

Accounting is indispensable in the modern society. This module will help the students
to understand the meaning of various terms used in accounting, meaning, objectives,
advantages and limitations of book keeping and accountancy and the difference
between the two. The module will also give an insight to the learners about the
various concepts and conventions applied in the field of accounting and develop
accounting equation on the basis of the knowledge so obtained.
Lesson 1 : Introduction to Accounting

Lesson 2 : Accounting Concepts and Conventions
Lesson 3 : Accounting Terms

Web Ratna Awards 2012 Platinum Icon under
Outstanding Web Content for Acknowledging exemplary
initiatives/practices in the realm of e-Governance for dissemination of
information & services instituted by Department of Information
Technology, Ministry of Communications & IT (MC&IT) and National
Informatic Centre (NIC), Government of India. The award has been
conferred by Honble Minister of Communications and Information
Technology Shri Kapil Sibal on 10th December 2012 at Dr. D.S Kothari
Auditorium, DRDO Bhawan, Dalhousie Road, New Delhi.
TOI Social Impact Award 2012

NIOS has been selected as
winner of the Social Impact
Award 2012 instituted by Times
of India in partnership with J P
Morgan The Award is given in
the recognition of magnificent
work done by an individual or
groups or institutions making an
impact in the society in various
segment including Education. NIOS feels honoured to accept the award.
The award was conferred on 28th January 2013 at a function in presence of President of India and
high level dignitaries.
National Awards for the Empowerment of Persons with Disabilities, 2012

The NIOS received the National Award for the
Empowerment of persons with disabilities, 2012
Instituted by Ministry Social Justice and Empowerment,
Govt. of India. The NIOS got this award under the
category of best accessible Website for making its
website www.nios.ac.in completely accessible for
person with disabilities. The website is bilingual in Hindi
and English. It also has provisions of Screen Reader,
increasing text size, colour contrast scheme etc. for
disabled learners. This award was conferred by the
Honble President of India at Vigyan Bhawan, New Delhi on 6th February, 2013. Dr. S.S. Jena
Chairman, NIOS received the award.
MODULE - I
Introduction and
Basic Concepts
1
INTRODUCTION TO Notes
ACCOUNTING
You must have seen a shopkeeper selling goods to earn profit. He/she sells goods
for cash and on credit, purchases the goods from suppliers, pays for electricity bills,
telephone bills, wages to workers etc. These are all business transactions involving
money. A large number of such transactions take place daily. A businessman cannot
remember all these transactions, he therefore, keeps a record of all these transactions
in writing, so that he can make use of this recorded information later on. The trader
would like to know at the end of a period (which is generally one year), what he has
earned during this period from his business. He would also like to know the amount
he has to pay to his suppliers and the amount his customers have to pay to him. He
can get various other information of this kind only if he maintains proper record of
business transactions, which have taken place during the year. This is called Book
Keeping. This information needs, to be recorded, classified and summarized in a
systematic manner. It is called Accounting. In this lesson you will learn the meaning,
objectives and uses of Book-keeping and Accounting.
OBJECTIVES
After studying this lesson, you will be able to:
explain the meaning of business transactions;
explain the meaning of book-keeping;
identify the need of book-keeping;
describe the objectives of book-keeping;
define the term accounting;
explain the branches of accounting;
discuss the objectives of accounting;
describe the advantages and limitations of accounting;
distinguish between book-keeping and accounting and
identify the users of accounting information and understand the various uses
of accounting information.
ACCOUNTANCY 3
MODULE - I Introduction to Accounting
Introduction and
Basic Concepts 1.1 BUSINESS TRANSACTIONS
In your own house, you see many transactions taking place, for example, purchase
of vegetables, paying for school fee, telephone, rent, etc. Just as many transactions
take place in a house, many more transactions take place in a business.
Notes Let us observe the activities of a nearby stationery shop. A customer comes, he buys
register and pays money for it. Then, another customer comes, he buys a text-book
and pays for it. After sometime, a third customer comes to the shop, he purchases
different stationery items like writing pads, pencils, pens, etc., he buys these items
on credit. Then, a supplier comes, he supplies various stationery items to the
shopkeeper and submits a bill. The shopkeeper keeps the bill and promises to pay
after one month. These are some of the important business transactions. There can
be many more such activities. You have noticed that these business transactions
involve exchange of goods for money or promise for payment in future. These
transactions have some important features which are as follows:
i. Business transactions are business activities.
ii. These involve exchange of goods or services like transportation, storage,
packaging, etc for money or moneys worth.
iii. These are monetary in nature.
iv. In cash business transactions, goods or services are exchanged for money.
v. In credit business transactions, goods or services are exchanged but
money is received or paid at a future date.
vi. All business transactions are recorded in the books of accounts.
You might have noticed that all the above business transactions are with
the OUTSIDERS. Sometimes, business transactions pertain to the OWNER.
For example, Abhishek starts a small shop with cash `1,00,000/-. In
exchange, the owner (Abhishek) gets an ownership right against business.
Take another example, Abhishek withdraws goods costing `5,000/- from
the shop for his own use. It is a business transaction. Here, the owner gets
goods worth `5,000/- while, the business gets a right to receive money from the
owner. Thus you may say that business transactions pertain to the outsiders or
to the owner. Now, business transaction may be defined as:- An exchange of
goods, services, or any other activity for money or moneys equivalent. It involves
exchange of money also. In simple words, it includes all events and activities of
business which are financial in nature.
You know that a businessman enters into several transactions in a day. Some of
these may be meant for his personal purposes. For example, Abhishek goes to a
movie with his friends. This is his personal transaction and not the business transaction.
Since a business transaction has an effect on business, therefore, it is recorded in the
4 ACCOUNTANCY
Introduction to Accounting MODULE - I
Introduction and
books of the business. Owners personal transactions where the money of the business Basic Concepts
is not affected, are not recorded anywhere in the books of the business. This
separation of business transactions and personal transactions is very helpful in
recording business transactions.
Notes
INTEXT QUESTIONS 1.1
I. Find which of the statements are true and which are false:
i. Shifting of goods from one place to another within a shop is
business transaction.
ii. Profit is the reward to the owner for his business activities.
iii. Purchase of vegetables for use at home is not business
transaction.
iv. Purchase of goods on credit for personal use from his friend is
personal transaction.
II. Classify the following into business and non-business transactions:
i. Rahim starts business with Cash `1,00,000/-
ii. He deposits money into the Bank `50,000/-
iii. He buys goods for Cash `10,000/-
iv. He takes out money from the shop and gives it to his wife for
buying a saree `1,000/-
v. He attends a family function and gets present worth `3,000/-
vi. He pays salary to his domestic servant `500/- out of his pocket.
1.2 BOOK-KEEPING
Some people take book-keeping and accounting as synonymous terms, but
they are different from each other. Book-keeping is mainly concerned with
recording of financial data relating to the business operations in a significant
and orderly manner. Book-keeping involves the systematic recording of the
financial transactions and the maintenance of the correct & up-to-date financial
records of the organization. Accounting is primarily concerned with designing
the systems for recording, classifying and summarizing the data and interpreting them
for internal and external end users. Accountants often direct and review the work of
the book-keepers.
Need of Book-keeping
It is significant for a business to have transparent record keeping systems which
would make the transaction clear. The need of book-keeping can be under
stood with the help of the following points:
i) Helps in Assessing the Financial Position: Recording the business
ACCOUNTANCY 5
Introduction and
Basic Concepts transactions would be helpful to businessman for monitoring the financial
success or failure of his business. You probably dont know where you are
going if you do not realize where you have been. Hence, understanding the
existing scenario of financial status of business is of much importance to the
business to achieve the objectives and avoid the unexpected losses.
Notes ii) Helps in making business decisions : Keeping a record would help to
make future business decision. Business decisions have to be taken by
considering the financial consequences that happened earlier and the
same can be done only if we maintain the accounting books properly.
Without the precise data and financial information, it is extremely
difficult to predict the impact of any given action.
iii) For Record for Income tax Purposes : Maintaining books of accounts
would help businessmen to file the income tax returns accurately. Every
business entity has to file income tax returns and pay income tax. With
proper records, it is very easy to prepare the tax returns and filing can
also be done on time without any delay.
iv) Preparing Budgets : Keeping the older transactions would help you to
plan the budget for forthcoming year. Preparing budget would keep
you on the safer side and help you to avoid the unwanted expenditure.
v) Tax Assessment : Keeping good records would help you to prepare payroll,
tax returns and sales tax without any delay. If you are doing a partnership
business, you can avoid unwanted issues in profit distribution by
recording your business transactions accurately.
Moreover, effective book-keeping would help you to identify the activities, which are
not profitable, and the unwanted operating expenses. Businessman can avoid such
expenditures and prepare an effective budget to optimize business financially. Hence,
book-keeping plays an essential role in every business.
Objectives of Book-keeping
After understanding the need of book-keeping let us now discuss the objectives
of book-keeping which are as follows:
i) To show permanent record of business : Book keeping is to record
business transactions in proper books of accounts which can be kept
safe for years together.
ii) To know profit or loss of business : Various statements are prepared
from the information contained in books of accounts called final accounts.
One of such statements is called Income Statement or Profit and Loss
Account which helps in ascertaining business profit.
iii) To know the financial position of business : Book keeping helps in
preparing balance sheet and ascertaining the net capital employed.
6 ACCOUNTANCY
Introduction and
iv) To provide information of total sales and purchases of business : Basic Concepts
Businessman is interested in knowing the total sales and total
purchases of business which help him in taking decisions regarding
sales strategies.
v) To provide information about creditors and debtors of business :
Businessman would like to know how much and to whom he owes and Notes
how much and who owe to him. Book-keeping records will help in it.
vi) To know the quantity and value of stock : Quantity and value of stock is
required to manage stock levels. This can be ascertained by maintaining
proper books of accounts.

Which of the following statements are True and which are False?
i. Book-keeping is concerned with recording of business transactions in
a systematic and significant manner.
ii. Book-keeping and accounting are synonymous terms.
iii. Book-keeping is a broader term than accounting.
iv. Book-keeping helps in preparing budget of the business.
1.3 ACCOUNTING
Accounting has rightly been termed as the language of the business. The basic
function of a language is to serve as a means of communication. Accounting
communicates the result of business operations to various parties who have
some stake in the business. With the help of accounting records the business is
able to ascertain the profit or loss and the financial position of the business at
the end of a given period and communicate such information to all interested
parties. The function of accounting is to provide quantitative information,
primarily of financial nature, about economic entities, that is needed to be
useful in making economic decisions.
The meaning of accounting was given by the American Institute of Certified
Public Accountants (AICPA) in 1961 when it defined accounting as :
Accounting is the art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events, which are, in part at
least, of financial character and interpreting the results thereof:
American Accounting Association (AAA) has defined Accounting as:
Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the information.
ACCOUNTANCY 7
Introduction and
Basic Concepts Branches of Accounting : There are three branches of accounting :
i) Financial Accounting : Financial Accounting is concerned with recording
financial transactions, summarising and interpreting them and communicating
the results to users. It shows the profit or loss of a particular period & the
position of the business on a particular date.
Notes ii) Cost Accounting : It helps in finding out the cost of production of a product
manufactured or services rendered and helps the management in decision
making.
iii) Management Accounting : Management Accounting is concerned with
generating accounting information relating to funds, costs, profits etc.
as it enables the management in decision making.
You will study only Financial Accounting in this course.
Objectives of Accounting
The following are the main objectives of accounting:
i) To keep systematic records : Accounting is done to keep a systematic
record of financial transactions, like purchase of goods, sale of goods,
cash receipts and cash payments.
ii) To ascertain the operational profit or loss : Accounting helps in
determining the net profit earned or loss suffered on account of running the
business. This is done by keeping a proper record of revenues and expenses
of a particular period.
iii) To ascertain the financial position of the business : The businessman is
not only interested in knowing the operating result, but also interested in
knowing the financial position of his business i.e., where it stands. In other
words, he wants to know what the business owes to others and what others
owe to business.
iv) To facilitate rational decision making : Apart from the owners, there are
various other parties who are interested in knowing about the position of
business, such as tax authorities, the management, the bank, the creditors,
etc. The required information is furnished to all these parties through
accounting system.
Advantages of Accounting
i) Replaces memory : Since all the financial events are recorded in the books.
The books of accounts will serve as historical records. Any information
required at any time can be easily collected from these records.
ii) Meets the information requirements : Various interested parties such as
owners, lenders, creditors, etc., get the necessary information at frequent
intervals which help them in their decision making.
8 ACCOUNTANCY
Introduction and
iii) Assists the management in many other ways : The accounting Basic Concepts
information provided to the management helps them in taking rational decisions
in planning and controlling all business activites.
iv) Facilitates a comparative study : With the help of accounting information
one can compare the present performance of the enterprise with its past
performance and also with that of similar organisations. This enables the Notes
management to draw useful conclusion about the business and make efforts
to improve the performance.
v) Acts as reliable evidence : Systematic record of business transactions is
generally treated by courts as good evidence in case of disputes.
vi) Tax matters: The Government levies various taxes such as custom duty,
excise duty, sales tax, and income tax. Properly maintained accounting records
will help in the settlement of all tax matters with the tax authorities.
vii) Ascertaining value of business: In the event of sale of a business firm,
the accounting records will help in ascertaining the correct value of business.
Limitations of Accounting
i) Financial accounting permits alternative treatment : Accounting is
based on concepts and it follows Generally Accepted Principles but
there exist more than one principle for the treatment of any one item. This
permits alternative treatments within the framework of Generally Accepted
Principles. For example, the closing stock of a business may be valued by
any one of the following methods: FIFO (First-in-First-out), LIFO (Last-
in-First-out), Average Price, Standard Price etc., but the results are not
comparable.
ii) Financial accounting is influenced by personal judgments :
Accounting is influenced by personal judgments as one accountant may
consider the life of a particular asset say 5 years whereas another
accountant may consider the life of that asset say 6 years and the method
of charging the depreciation on asset by both the accountants may also
be different.
iii) Financial accounting ignores non-monetary information : Financial
accounting does not consider the transactions of non-monetary nature.
For example, extent of competition faced by the business, technical
innovations possessed by the business, loyalty and efficiency of the
employees etc. are the important matters in which management of the
business is highly interested but accounting is not tailored to take note
of such matters.
iv) Financial accounting does not provide timely information : Financial
accounting is designed to supply information in the form of statements
(Balance Sheet and Profit and Loss Account) for a period normally one
ACCOUNTANCY 9
Introduction and
Basic Concepts year. The business requires timely information at frequent intervals to enable
the management to plan and take correct action wherever the performance
is not as per plans.
1.4 DIFFERENCES BETWEEN BOOK KEEPING AND
ACCOUNTING
Notes
Book keeping and Accounting have the following points of differences :
Basis of distinction Book-Keeping Accounting
i) Objective The objective of Book- Accounting aims at
keeping is to maintain maintaining business records,
records of business calculation of business income,
transactions. and depiction of financial
Position and communication
of business results
ii) Function The function of Book- The function of Accounting
is to record business is recording, classifying,
transactions. summarizing interpreting the
business transactions and
communicating the results.
iii) Scope Book-keeping has a It has wider scope.
limited scope.
iv) Level of For, it elementary know- In accounting, advance and
knowledge ledge of accounting rules in depth understanding is
required. is enough. required.
v) Basis of recording For recording business Book-keeping serves the
transactions, vouchers basis for accounting
and other supporting information.
documents are prepared.
vi) Stage It is primary stage. It is the final stage.
vii) Level of Person Lower level mainly Higher level mainly qualified
Engaged. account clerks. accountants.
1.5 USERS OF ACCOUNTING INFORMATION

Accounting is of primary importance to the proprietors and the managers. There are
many more parties who use the accounting information. These parties are as follows:
10 ACCOUNTANCY
Introduction and
i) Investors and Potential Investors : A person who wants to invest in Basic Concepts
business will like to know about its profitability and financial position.
Basically, investors are interested in the amount of dividends they are likely
to get from the business. Hence, they would like to know the profitability of
the enterprise which they can get from the income statements of the enterprise
for a number of years.
Notes
ii) Creditors : Creditors are the persons who have extended credit to the
business. They would like to know whether the enterprise will be in a position
to meet its commitments well in time towards them both regarding payment
of interest and principal. Their main interest lies in liquidity and profitability
of business enterprise.
iii) Proprietors : The proprietor is the owner of business who starts the business
with an objective to make profit. He is interested in knowing the position of
his business as if he is earning profits or incurring loss. The profitability and
financial soundness are, therefore, matters of prime importance to the
proprietors who have invested their money in the business.
iv) Employees : The employees are interested in the financial statements on
account of various profit sharing and bonus schemes. Their interest may
further increase in case they purchase shares of the companies in which they
are employed. They are interested in more wages or salary, bonus, overtime
payments, medical facilities and their demands for these matters are based
on profitability as provided by income statement.
v) Customers : They are interested in knowing whether a company will continue
to honour product warranties and continue to provide its products in future,
and how much profit is made by a company by providing goods and services
to them.
vi) Government : The Government is interested in the financial statements of
business enterprise on account of taxation, labour and corporate law. The
reason is that the Government activities and welfare schemes are financed
through collection of different types of taxes. So they would like to know,
whether the business is paying appropriate taxes well in time or not.
vii) Researchers : They need accounting information for the purpose of studying
the financial aspects of business enterprises and their effect on the economy
as a whole, so that the new policies & planning can be made.

I. Fill in the blanks:
i. Accounting is the language of the ____________.
ii. Accounting records only transactions which are of a ______ character.
iii. Accounting starts where ___________ ends.
ACCOUNTANCY 11
Introduction and
Basic Concepts iv. _____________ is influenced by personal judgments.
v. _______ is concerned only with the recording of business transactions.
II. Multiple Choice Questions
i. Which of the following is an advantage of accounting?
a) Personal judgements influence it.
Notes b) Helps in keeping systematic records.
c) Acts as a reliable evidence.
d) Shows permanent record of business.
ii. Which of the following is not an advantage of Accounting?
a) Replaces memory.
b) Facilitates a comparative study.
c) It permits alternative treatments.
d) Helps in knowing the value of business.
iii. Which of the following is a limitation of Accounting?
a) Ascertaining value of business.
b) It is influenced by personal judgments.
c) It helps in ascertaining right amount of taxes.
d) Facilitates a comparative study.
iv. Which is a correct statement related to book-keeping?
a) Book keeping is summarizing and analyzing of business
transactions, financial in nature.
b) Book keeping is posting transactions in the ledger.
c) Book keeping is recording business transactions in an
orderly manner.
d) None of the above.
v. To ascertain the operational profit or loss is:
a) An objective of Accounting.
b) An advantage of Accounting.
c) A limitation of Accounting.
d) Need of Accounting.
vi. Book-Keeping is recording:
a) All events affecting a business.
b) All business transactions.
c) Only business transactions with outsiders.
d) Only internal business transaction.
vii. Which of the following is not a business transaction?
a) Purchase of goods for business.
b) Sale of goods.
c) Payment of sales tax.
d) Payment of house tax belonging to owner.
12 ACCOUNTANCY
Introduction and
viii. Which of the following is not an advantage of accounting? Basic Concepts
a) Facilitates performance comparisons.
b) Acts as reliable evidence.
c) Influenced by personal judgement
d) Replaces memory.
Notes
WHAT YOU HAVE LEARNT

Business undertakes a series of transactions. It is not possible to remember
all the transactions which have taken place over a period of time, and
calculate the net effect of all such transactions. i.e., profit or loss. Hence,
the need for accounting arises.
Information about the business enterprise is required for both internal and
external use. To get the required information, a systematic record is necessary.
Accounting is the process of identifying, measuring, recording, classifying,
summarising, analysing, interpreting and communicating the results of financial
transactions and events.
The objectives of accounting are: to keep systematic records; to ascertain
the profit or loss and also the financial position; and to provide accounting
information to interested parties for rational decision-making.
Book-keeping is a part of accounting. It is the record keeping function of
accounting and is limited upto the classifying stage.
Bookkeeping is largely a mechanical process and does not involve any
analysis of the financial transactions whereas, accounting includes the
preparation of statements concerning assets, liabilities and the operating results
of a business.
Many groups of people like owners, management, lenders, creditors,
investors, tax authorities, employees, etc., are interested in the
accounting information of the enterprise.
There are many advantages of properly maintained accounting system such
as it acts as reliable evidence, helps in determining tax liability. It may also
lead to many limitations such as influenced by personal judgements, ignores
important non-monetary informations etc.
TERMINAL EXERCISE
1. What is meant by book-keeping? State the need of book keeping.
2. Define accounting. What are its objectives?
3. How is accounting information useful to Government and Investors?
4. Distinguish between accounting and book- keeping.
ACCOUNTANCY 13
Introduction and
Basic Concepts 5. Explain the advantages and limitations of accounting.
6. What is a business transaction? Give five examples of business
transactions.
7. Explain the different branches of Accounting.
8. Explain how accounting is useful to employees.
Notes
ANSWER TO INTEXT QUESTIONS

1.1 I. i)False ii)True iii) True iv) True
II. i) Business ii) Business, iii) Business, iv) Non-business,
v) Non-business, vi) Non-business
1.2 i) True ii) False iii) False iv) False
1.3 I. i) Business ii) Financial iii) Book-keeping
iv) Financial accounting v)Book-keeping
II. i) c, ii) c, iii) b, iv) c, v) a, vi) b, vii) d, viii) c.
ACTIVITY FOR YOU
Visit two small business organisations and meet their Accountants and
Senior Accounts officers and identify their accounts maintaining activities.
14 ACCOUNTANCY
MODULE - I
Introduction and
Basic Concepts
2
ACCOUNTING CONCEPTS AND Notes

CONVENTIONS
In the previous lesson, you studied the meaning and objectives of Financial Accounting.
There are some concepts and conventions which are followed in accounting for a long
time. These concepts constitute the very basis of accounting. All the concepts have
been developed over the years from experience and thus, are universally accepted
rules and are termed as Generally Accepted Accounting Principle or GAAP. In
accounting, there are many conventions or practices which are used while recording
the transactions in the books of accounts. In this lesson you will learn accounting
concepts and conventions.
OBJECTIVES
After studying this lesson, you will be able to :
understand the meaning of the term accounting concepts;
explain the meaning and significance of accounting concepts : Business Entity,
Money Measurement, Going Concern and Dual Aspect;
understand the meaning of the term accounting conventions and
explain the meaning and significance of accounting conventions of Materiality,
Conservatism and Consistency.
2.1 ACCOUNTING CONCEPTS
Accounting Concepts refer to the basic assumptions, rules and principles which
work as the basis of recording of business transactions and preparing accounts.
Main Accounting Concepts are:
Business Entity Concept
Money Measurement Concept
Going Concern Concept
Dual Aspect Concept
2.2 BUSINESS ENTITY CONCEPT
This concept assumes that, for accounting purposes, the business enterprise and its
owners are two separate entities. Thus, the business and personal transactions of its
ACCOUNTANCY 15
MODULE - I Accounting Concepts and Conventions
Introduction and
Basic Concepts owner are separate, for example, when the owner invests money in the business, it is
recorded as liability of the business to the owner. Similarly, when the owner takes
away cash/goods from the business for his/her personal use, it is not treated as
business expense. Thus, the accounting records are made in the books of accounts
from the point of view of the business unit and not from the point of view of the
owner.
Notes
Let us take an example, Ms. Sakshi started business by investing ` 2,00,000.
She purchased goods for ` 20,000, Furniture for ` 10,000, Plant and Machinery
of ` 50,000 and ` 10,000 remained in hand. These are the assets of the business
and not of the owner. According to the business entity concept ` 2,00,000 will
be treated by business as capital i.e. a liability of business towards the owner
of the business.
Now suppose she takes away from business ` 5,000 in cash and goods worth
`5,000 for her domestic purposes. This withdrawal of cash & goods by the owner
from the business are her private expenses and not the expenses of the business.
These are termed as Drawings. Thus, the business entity concept states that business
and the owner are two separate/distinct entities. Accordingly, any expense incurred
by owner for himself/herself or for his/her family from business will not be considered
as an expense but it will be treated as drawings. Since business and its owners
according to this concept are treated as separate entities therefore, the transactions
between these two are recorded in the books of accounts.
Significance
The following points highlight the significance of business entity concept:
This concept helps in ascertaining the profit of the business as only the business
expenses and revenues are recorded and all the private and personal expenses
are ignored.
This concept restraints accountants from recording of owners private/
personal transactions.
It also facilitates the recording and reporting of business transactions from
the business point of view
It is the very basis of accounting concepts, conventions and principles.

Fill in the blanks with suitable word/words :
i. The accounting concepts are basic ___________ of accounting.
ii. ___________ concept assumes that business enterprise and its owners are
two separate independent entities.
iii. The goods withdrawn from business for owners personal use are called
___________ .
16 ACCOUNTANCY
Accounting Concepts and Conventions MODULE - I
Introduction and
2.3 MONEY MEASUREMENT CONCEPT Basic Concepts
This concept assumes that all business transactions must be in terms of money that is
in the currency of the concerned country. In our country such transactions are in
terms of rupees (`). Thus, as per the money measurement concept, transactions
which can be expressed in terms of money are recorded in the books of accounts.
Notes
For example, sale of goods worth ` 1,00,000, purchase of raw materials ` 50,000,
rent paid ` 20,000 etc. are expressed in terms of money, and so they are recorded
in the books of accounts. But the transactions which cannot be expressed in monetary
terms are not recorded in the books of accounts. For example, sincerity, loyalty and
honesty of employees are not recorded in books of accounts because these cannot
be measured in terms of money although they do affect the profits and losses of the
business concern.
Another aspect of this concept is that the records of the transactions are to be kept
not in the physical units but in the monetary unit. For example, at the end of the year
2011, an organisation may have a factory on a piece of land measuring 5 acres,
office building containing 10 rooms, 20 personal computers, 30 office chairs and
tables, 50 kg of raw materials etc. These are expressed in different units, but for
accounting purposes these are to be recorded in money terms i.e. in rupees (`). In
this case, the cost of factory land may be say ` 6 crore, office building ` 5 crore,
computers ` 5 lakhs, office chairs and tables ` 1 lakh, raw material ` 15 lakhs.
Thus, the total assets of the organisation are valued at ` 11 crore and ` 21 lakhs.
Therefore, the transactions which can be expressed in terms of money are recorded
in the books of accounts and not in terms of the quantity.
Significance
The following points highlight the significance of money measurement concept:
This concept guides accountants what to record and what not to record.
It helps in recording business transactions uniformly.
If all the business transactions are expressed in monetary terms, it will be
easy to understand the accounts prepared by the business enterprise.
It facilitates comparison of business performance of two different periods of
the same firm or of the two different firms for the same period.

From the following identify the transactions that can be recorded in books of
accounts and that cannot to be recorded?
i. Health of a Managing Director.
ii. Purchase of factory building ` 5 crore.
ACCOUNTANCY 17
Introduction and
Basic Concepts iii. Rent paid ` 20,000.
iv. Goods worth ` 40,000 given as charity.
v. Delay in supply of raw materials.
2.4 GOING CONCERN CONCEPT
Notes This concept states that a business firm will continue to carry on its activities for an
indefinite period of time. Simply stated, it means that every business entity has
continuity of life. Thus, it will not be dissolved in the near future. This is an important
assumption of accounting, as it provides a basis for showing the value of assets in the
balance sheet; For example, a company purchased plant and machinery of `
1,00,000 and its life span is 10 years. According to this concept every year some
amount will be shown as expense and the balance amount as an asset. Thus, if an
amount is spent on an item which will be used in business for many years, it is not
correct to charge the amount from the revenues of the year in which the item is
acquired. Only a part of the value is shown as expense in the year of purchase and
the remaining balance is shown as an asset.
Significance
The following points highlight the significance of going concern concept:
This concept facilitates preparation of financial statements.
On the basis of this concept, depreciation is charged on the fixed assets.
It is of great help to the investors, because, it assures them that they will
continue to get income on their investments.
In the absence of this concept, the cost of a fixed asset will be treated as an
expense in the year of its purchase.
Because of this concept business can be judged for its capacity to earn
profits in future.

Fill in the blanks by selecting correct words given in the bracket/brackets:
i. Going concern concept states that every business firm will continue to
carry on its activities ____________ (for a definite time period, for an
indefinite time period)
ii. Fixed assets are shown in the books at their ____________ (cost price,
market price)
iii. The concept that a business enterprise will not be closed down in the
near future is known as ____________ (going concern concept, money
measurement concept)
iv. On the basis of going concern concept, a business prepares its
____________ (financial statements, bank statement, cash statement)
18 ACCOUNTANCY
Introduction and
v. ____________ concept states that business is a distinct entity from its owner. Basic Concepts
(Going concern, Business entity)
2.5 DUAL ASPECT CONCEPT
Dual aspect is the foundation or basic principle of accounting. It provides the very
basis of recording business transactions in the books of accounts. This concept Notes
assumes that every transaction has a dual effect, i.e. it affects two accounts in their
respective opposite sides. Therefore, the transaction should be recorded at two
places. It means, both the aspects of the transaction must be recorded in the books
of accounts. For example, goods purchased for cash has two aspects which are:
(i) Giving of cash
(ii) Receiving of goods.
These two aspects are to be recorded. Thus, the duality concept is commonly
expressed in terms of fundamental accounting equation:
Assets = Liabilities + Capital
The above accounting equation states that the assets of a business are always equal to
the claims of owner/owners and the outsiders. Owners claim is also termed as capital or
owners equity and that of outsiders, as liabilities or creditors equity.
The knowledge of dual aspect helps in identifying the two aspects of a transaction,
which help in applying the rules of recording the transactions in books of accounts.
The implication of dual aspect concept is that every transaction has an equal impact
on assets and liabilities in such a way that total assets are always equal to total
liabilities.
Let us analyse some more business transactions in terms of their dual aspect:
i) Capital brought in by the owner of the business : First aspect Receipt
of cash, Second aspect Increase in Capital (owners equity).
ii) Purchase of machinery by cheque : First aspect Owning of Machinery,
Second aspect Reduction in Bank Balance.
iii) Goods sold for cash : First aspect Receipt of cash, Second aspect, delivery
of goods to the customer.
iv) Rent paid in cash to the landlord : First aspect Rent (Expenses incurred),
Second aspect payment of cash.
Once the two aspects of a transaction are known, it becomes easy to apply the rules
of accounting and maintain the records in the books of accounts properly. The
interpretation of the Dual Aspect Concept is that every transaction has an equal
effect on assets and liabilities in such a way that total assets are always equal to total
liabilities of the business.
ACCOUNTANCY 19
Introduction and
Basic Concepts Significance
The following points highlight the significance of Dual Aspect Concept
This concept helps the accountant in detecting errors.
It encourages the accountant to post each entry in opposite sides of two
affected accounts.
Notes It helps in preparing the Financial Position Statement/ Balance Sheet on a
particular date.

Write the two aspects (effects) of the following transactions :
S.No. Transaction Ist aspect IInd aspect
i. Owner brings cash in business
ii. Goods purchased for cash
iii. Goods sold for cash
iv. Furniture purchased for cash
v. Received cash from Sharma
vi. Purchased machine from Rama on credit
vii. Paid to Ram
viii. Salaries paid
ix. Rent paid
x. Commission received
2.6 MEANING OF ACCOUNTING CONVENTIONS

Accounting conventions refer to common practices which are universally followed
in recording and presenting accounting information of the business entity. These are
followed like customs, traditions etc. in a society. Accounting conventions are evolved
through the regular and consistent practice over the years to facilitate uniform recording
in the books of accounts. Accounting conventions help in comparing accounting
data of different business units or of the same unit for different periods. These have
been developed over the years. The most important conventions which have been
used for a long time are:
Convention of Consistency.
Convention of Materiality.
Convention of Conservatism.
2.7 CONVENTION OF CONSISTENCY

The convention of consistency means that same accounting principles should be used
20 ACCOUNTANCY
Introduction and
for preparing financial statements year after year. A meaningful conclusion can be drawn Basic Concepts
from financial statements of the same enterprise when there is a comparison between
them over a period of time. But this can be possible only when accounting policies and
practices followed by the enterprise are uniform and consistent over a period of time.
If different accounting procedures and practices are used for preparing financial
statements of different years, then the result will not be comparable. Generally a Notes
businessman follows the same general practices or methods year after year, for preparing
the books of accounts.
While charging depreciation on fixed assets or valuing unsold stock, once a particular
method is used, it should be followed year after year. So that the financial statements
can be analysed and compared provided that, the depreciation on fixed assets is
charged or unsold stock is valued by using same method year after year. This can be
further clarified in case of charging depreciation on fixed assets, accountant can
decide to adopt any one method of depreciation such as diminishing value method
or straight line method. Similarly, in case of valuation of closing stock it can be
valued at actual cost price or market price, whichever is less. However, precious
metals like gold, diamond, minerals are generally valued at market price only.
Therefore, as per this convention the same accounting methods should be adopted
every year in preparing financial statements. But it does not mean that a particular
method of accounting once adopted can never be changed. Whenever a change in
method is necessary, it should be disclosed by way of footnotes in the financial
statements of that year.
Significance
The following points highlight the significance of Convention of Consistency
It facilitates comparative analysis of the financial statements.
It ensures uniformity in charging depreciation on fixed assets and valuation
of closing stock.

Fill in the blanks with suitable word/words:
i. Convention of consistency means that same accounting principles
should be followed for preparing financial statements __________ .
ii. Unsold goods are valued at cost price or __________ whichever is________.
iii. Precious metals, like gold, silver etc. are generally valued at __________ .
ACCOUNTANCY 21
Introduction and
Basic Concepts iv. As per the convention of __________ year after year same methods of
valuation of assets is followed.
2.8 CONVENTION OF MATERIALITY

The convention of materiality states that, to make financial statements meaningful,
Notes only material fact i.e. important and relevant information should be supplied to the
users of accounting information. The question that arises here is what is a material
fact? The materiality of a fact depends on its nature and the amount involved. Material
fact refers to the information that will influence the decision of its user. For example,
a businessman is dealing in electronic goods. He purchases T.V., Refrigerator, Washing
Machine, Computer etc. for his business. In buying these items he uses larger part of
his capital. These items are significant items; thus should be recorded in books of
accounts in detail. At the same time to maintain day to day office work he purchases
pen, pencil, match box, scented stick, etc. For this he will use very small amount of
his capital. But to maintain the details of every pen, pencil, match box or other small
items is not considered of much significance. These items are insignificant items and
hence they should be recorded separately. Thus, the items that are significantly
important in recording the details are termed as material facts or significant items.
The items that are of less significance are immaterial facts or insignificant items.
Thus, according to this convention important and significant items should be recorded
in their respective heads and all immaterial or insignificant transactions should be
clubbed under a different accounting head.
Significance
The following points highlight the significance of Convention of Materality
It helps in minimising errors in calculation.
It helps in making Financial Statements more meaningful.
It saves time and resources.

i. __________ convention states that to make financial statements more
meaningful, only significant and important items should be supplied to
the users.
ii. Convention of materiality states that insignificant items should be disclosed
under __________ .
22 ACCOUNTANCY
Introduction and
iii. __________ convention keeps accountants and manager to focus on Basic Concepts
important /significant items.
iv. __________ means the information which will influence the decision.
2.9 CONVENTION OF CONSERVATISM

This convention is based on the principle that Anticipate no profit, but provide Notes
for all possible losses. It provides guidance for recording transactions in the
books of accounts. It is based on the policy of playing safe in regard to showing
profit. The main objective of this convention is to show minimum profit. Profit should
not be overstated. If more profit is shown than the actual, it may lead to distribution
of dividend out of capital. This is not a fair policy and it will lead to the reduction in
the capital of the enterprise.
Thus, this convention clearly states that profit should not be recorded until it is earned.
But if the business anticipates any loss in the near future, provision should be made
in the books of accounts for the same. For example, valuing closing stock at cost or
market price whichever is lower, creating provision for doubtful debts, discount on
debtors, writing off intangible assets like goodwill, patent, etc. The convention of
conservatism is a very useful tool in situation of uncertainty and doubts.
Significance
The following point highlight the significance of convention of conservatism

It helps in ascertaining actual profit.
It is useful in the situation of uncertainties and doubts.
It helps in maintaining the capital at its real value.

I. Give your decision in the following situations :
(i) A business has unsold stock at the end of year. The cost price is
`20,000 and its market price is `25,000. At which price the
unsold stock should be recorded?
(ii) What is your decision if the cost price in the above case is
`21,000 ?
(iii) A businessman anticipates that it may not be possible to collect
`5,000 from one of his debtors. Will he record this transaction in
books of account?
ACCOUNTANCY 23
Introduction and
Basic Concepts II. Multiple Choice Questions
i. According to going concern concept, a business is viewed as having:
a) a limited life
b) a very long life
c) an indefinite life
Notes d) a long life
ii. Valuation of stock at lower of cost or net realizable value is an
example of
a) Consistency convention
b) Conservation convention
c) Materiality convention
d) None of the above
iii. According to which of the following concepts the two aspects
of a transaction are recorded.
a) Matching concept
b) Money Measurement concept
c) Dual aspect concept
d) Realisation concept
iv. According to which of the following accounting concepts, even
the owner of a business is considered as creditor to the extent
of his capital.
a) Money measurement concept
b) Dual aspect concept
c) Business entity concept
d) Realisation concept
v. The convention of conservatism takes into account
a) All prospective losses but leaves prospective profits
b) All prospective profits & leaves prospective losses
c) All prospective profits and prospective losses
d) Leaves all prospective profits and prospective losses

An accounting concept refers to the basic assumptions which serve the basis
of recording actual business transactions.
The important accounting concepts are business entity, money measurement,
going concern, dual aspect concept.
24 ACCOUNTANCY
Introduction and
Business entity concept assumes that for accounting purposes, the business Basic Concepts
enterprise and its owner(s) are two separate entities.
Money measurement concept assumes that all business transactions must
be recorded in the books of accounts in terms of money.
Going concern concept states that a business firm will continue to carry on
its activities for an indefinite period of time. Notes
Dual aspect concept states that every transaction has a dual effect.
Accounting conventions are common practices which are followed in
recording and presenting accounting information of business.
Convention of consistency states that the same accounting methods should
be adopted every year in preparing financial statements.
Convention of materiality states that, to make financial statements more
meaningful only significant information should be shown in the financial
statements.
Convention of conservatism states that, profit should not be recorded until it
is earned. But if business anticipates any loss in near future, provision for it
should be made in the books of accounts.
TERMINAL EXERCISE
1. Explain the meaning and significance of going concern concept.
2. What is meant by business entity concept?
3. State the meaning and significance of money measurement concept.
4. What do you mean by accounting concept? Explain any four accounting
concepts.
5. Explain the convention of consistency with the help of an example.
6. Explain the accounting convention of conservatism with example.
7. Explain the convention of materiality.
8. State the meaning and significance of dual aspect concept.

2.1 i) Rules ii) Business Entity iii) Drawings
2.2 i) not recorded ii) recorded iii) recorded iv) recorded v) not recorded
2.3 i) for an indefinite time period ii) cost price iii) going concern concept
iv) financial statements v) Business Entity
ACCOUNTANCY 25
Introduction and
Basic Concepts 2.4 i) Cash, Owner's capital ii) Goods received, cash
iii) Cash received, goods sold iv) Furniture, cash
v) Cash, Sharma vi) Machine, Rama
vii) Ram, cash viii) Salaries, cash
ix) Rent, cash x) Cash, Commission
Notes
2.5 i) Year after year ii) Market Price, Less
iii) Market Price iv) Consistency
2.6 i) Materiality ii) Different Accounting Heads

iii) Materiality iv) Materiality
2.7 I. i) ` 20,000 ii) ` 21,000 iii) yes

II. i) c ii) b iii) c iv) c v) a
ACTIVITY FOR YOU

Enquire from various Business Entities and list various accounting periods in
which these entities are not following same accounting practices.
26 ACCOUNTANCY
MODULE - I
Introduction and
Basic Concepts
3
ACCOUNTING TERMS Notes
Every subject has certain important basic terms, and Accountancy is no exception.
These terms facilitate the understanding of the subject. Hence, this lesson has been
designed to acquaint you with the knowledge of some important basic accounting
terms. The entire structure of Accounting rests upon these terms. The terms, that we
frequently use, are Assets, Liabilities, Revenue and Expenses.
OBJECTIVES
define various accounting terms such as Capital, Drawings, Assets, Liability,
Revenue, Expenditure, Expense, Profit, Losses, Purchases, Sales, Stock,
Debtors, Creditors, Receivables, Payables, Debit, Credit etc. and
identify these terms through case study.
3.1 ACCOUNTING TERMINOLOGY
One should be well aware of the various terms used in accounting so as to feel
comfortable with various aspects of accounting and make it clear and
understandable.
Capital : This is the amount invested by the owners in the business. It is also called
as owner's equity. Owners equity is the owners stake in the business. It shows
how much is his investment in the assets of the business.
Drawings : It is the amount of cash or goods drawn by the proprietor from the
business for his personal or domestic use.
Assets : Any thing that is owned by an individual or business and which can be
valued in terms of money is called an asset. In other words, any thing which
will enable the firm to get cash or a benefit in future is an asset. For example
land, building, machinery, furniture, stock, debtors, bank balance and cash etc.
Classification of Assets
i) Fixed Assets : The assets which are acquired not for resale but with the
ACCOUNTANCY 27
MODULE - I Accounting Terms
Introduction and
Basic Concepts purpose to increase the earning capacity of the business by employing them.
For example - land, building, machinery, computer, furniture, vehicles, live
stock etc.
ii) Current Assets : Current Assets are those assets which are retained in the
business with the purpose to convert them into cash within a short period of
Notes time say one year. For example - cash in hand, bills receivables, debtors,
stock (goods) etc.
iii) Tangible Assets : The assets which can be seen and touched or have physical
existence. For example - building, machinery, furniture, computer etc.
iv) Intangible Assets : The assets which cannot be seen and touched or
which do not have physical existence. For example - goodwill, trade mark,
patents etc.
v) Wasting Assets : Wasting assets are those assets which are natural
resources extracted and consumed as a raw material or otherwise. For
example - mines, quarries, oil wells etc.
Liability : The assets of a business concern are financed by the funds supplied by
the proprietors and outsiders. Money is invested by the proprietor to start his business.
Money is also borrowed from others and invested in business. With this money
assets are purchased. So the proprietor and outsiders have a claim against the assets
of the business. This claim of the proprietor and outsiders is termed as Liabilities.
In other words, any amount which the firm owes to the proprietors and outsiders is
liability for the business unit. Hence, liabilities are the obligations or debts payable by
the business unit in future.
Liabilities have been classified as:
i) External Liabilities
ii) Internal Liabilities
i) External Liabilities
External liabilities are those liabilities which the business owes to the
outsiders for goods purchased on credit, for expenses or for loans taken.
For example :
Creditors for goods : Sundry creditors, bills payable
Creditors for expenses : Expenses yet to be paid like outstanding salaries, wages
outstanding, rent due but not yet paid.
Creditors for loans : Bank loan, Bank overdraft, partners loan, loans taken from
other outsiders.
ii) Internal liabilities
Internal liabilities are those liabilities which the business owe to the owners
28 ACCOUNTANCY
Accounting Terms MODULE - I
Introduction and
or proprietors. It is the proprietors claim against the assets of the business. The Basic Concepts
Business Entity Assumption states that business is separate from its owners.
Any amount contributed by the owner towards the business concern is a liability
for the business concern. This liability is also termed as Capital. Hence, the
owners claim against the assets of the business unit is called as capital. In case
of one man business or sole proprietorship the capital is contributed by the Notes
proprietor himself. In case of partnership business firm, capital is contributed by
the partners, and in case of companies, capital is contributed by the shareholders.
Owners of the business are those who contribute capital. They get profit of the
business, for the risk taken by them. So, the owners have a claim against the
firm which is a liability for the firm.
Owners claim can be expressed as:
a) Capital
b) Interest on Capital (unpaid)
c) Profits of the business (undistributed)
d) Reserves.
Hence, capital is also a liability for the business unit.

I. Fill in the blanks with suitable words :
i. Outsiders and owners claim against the assets of the firm is called
__________ .
ii. Liabilities are classified into two categories _______ and ______ .
iii. Owners claim is __________ liability.
iv. Outsiders claim is __________ liability.
v. Owners claim against the assets of the business is also called as
__________ .
II. Classify the following items into external and internal liabilities :
i. Bank loan
ii. Interest on capital (unpaid)
iii. Capital
iv. Sundry Creditors
v. Outstanding rent
vi. Undistributed Profits
vii. Bills Payable
viii. Bank Overdraft
ix. Salaries due but not paid
x. Reserves
ACCOUNTANCY 29
Introduction and
Basic Concepts Revenue : Revenue refers to the inflow of money or other assets that results from
the sale of goods or services or from the use of money. It is the amount realized or
receivable from the sale of goods. Amount received from sale of assets or borrowing
loan is not revenue. In broader sense, revenue is also used to mean receipt of rent,
commission, discount, etc. Such inflows should be regular in nature and should be
Notes concerned with the day-to-day affairs of the business. It should be calculated in
the period in which it is earned or realized. For example, sale of goods, rent
received, interest on investment received, etc.
Revenue should not be confused with income. Income is the difference between
revenue and expense.
Expenses : Let us consider an example before we understand meaning of expense.
Rakesh has a textile mill. He purchases raw cotton and converts it into cloth. For this
purpose, he has engaged employees to whom he pays daily wages. He also has a
showroom where he sells the cloth that he produces. He has three salesman to
whom he pays salaries. In order to sell his product he has given advertisements in
the newspapers and television. He has done all this to earn profits. For Rakesh, cost
of raw cotton, wages, salaries and advertisement cost are all expenses which he has
incurred in order to earn revenue. All costs incurred in earning revenue is called as
expense. It refers to the cost which is incurred in acquiring an asset or service, e.g.
transportation cost incurred in transferring the raw cotton from the village to the
factory. It is the amount spent in order to produce and sell the goods and services to
earn the revenue, for example, cost of raw material, carriage, wages, insurance
premium, rent paid for office, etc.
Expenditure: Expense may be different from expenditure. Expenditure is generally
the amount spent for the purchase of assets. It increases the profit earning capacity of
the business, for example, furniture purchased, machines purchased, etc. Expense, on
the other hand, is an amount to earn revenue. Some examples of expenses are the
payments made for rent, wages, salaries, etc.
It can also be said that expenditure is considered as capital expenditure unless it is
qualified with words like revenue expenditure on rent, salaries, etc. while expense is
always considered as a revenue expense because it is always incurred to earn
revenue.
Profit : It is the excess of business revenue over the business expenses for a period.
It is an addition to the owners equity.
Losses : It is the decrease in the value of net assets. It is the excess of business
expenses incurred over the business revenue earned during the year. It decreases
the owners equity.
30 ACCOUNTANCY
Introduction and
Purchases : Purchases always refer to purchases of merchandise. Purchases means Basic Concepts
the purchases of such goods and services in which a firm deals. Purchases of cars for
an automobile dealer are purchases. For any other firm it is not a purchase.
Sales : It means exchange of such goods and services for money in which the firm
deals in. One of the most important objective of a business is to make profit. This
objective is achieved by selling goods and services at a price higher than their cost. Notes
Stock : It means, in case of a trader, all the goods or merchandise that he has for
sale in the ordinary course of business. In case of a manufacturer, stock may consist
of :
(a) Raw-material to be used for manufacturing goods;
(b) Semi-finished products or goods (i.e., raw-material in the process of
manufacturing and which has not yet been finished and which is not
yet fit for sale or subsequent use);
(c) Finished products or goods.
The goods meant for sale in case of a trader and raw material/semi-finished
goods/finished products for sale in case of a manufacturer are stock-in-trade or
inventory.
Receivables : In addition to debtors there may be some other persons also who
owe money to the business. They are called receivables. This includes Bills
Receivables also.
Payables : In addition to creditors there may be some other persons to whom
the business owes money. This includes Bills Payables also. These are called
payables.
Debtor and Creditor : The two other terms which are quite often used in the
recording of transactions are debtor and creditor. A thorough understanding
of these terms is very essential.
A debtor is a person who owes money. A creditor is a person to whom money is
owing. A person becomes a debtor when he receives some benefit. It may be in
the form of money, goods, or services. A person becomes a creditor when he
yields (gives) some benefit.
Example Ram sells goods to Dass on credit.
From the point of view of Ram, Dass is a debtor, as Dass is receiving a benefit
in the form of goods.
From the point of view of Dass, Ram is a creditor, as Ram is yielding a benefit in the
form of goods.
ACCOUNTANCY 31
Introduction and
Basic Concepts Debit and Credit : You should observe that every business transaction involves a
debit and a credit. The debit amounts are equal to credit amounts. This practice of
having equal debits and credits is called Double Entry Book-keeping. Under this
system every transaction has two aspects - as debit aspect and credit aspect and at
the time of recording a transaction, both these aspects are recorded.
Notes 3.2 CASE STUDY
Jay started a business with cash ` 2,00,000 on 1.4.2012. He opened a bank account
by depositing ` 50,000 on the same date. On 2.4.2012 he obtained a loan of `
1,00,000 from SBI. On 3.4.2012 he purchased goods of ` 70,000 from Ravi on
credit. On the same date he gave a bills payable to Ravi which will become due after
two months. On 12.4.2012 the machinery purchased from M/s Kailash Stores on
credit for ` 50,000. On 13.4.2012 he sold goods for cash ` 12,000 and on credit
to Ram ` 9,000. On the basis of your knowledge about basic accounting terms
identify the accounting terms involved in the above transaction of Jay.
Solution
On the basis of above case study the following accounting terms can be identified:
`
Capital 2,00,000
Bank Balance 1,50,000
Loan (Liability) 1,00,000
Ravi Creditor (Liability) 70,000
Bills Payable (In liew of Ravi Creditor liability) 70,000
Machinery (Assets) 50,000
Kailash Stores (Liability) 50,000
Sales (Revenue) 21,000
Cash (Assets) 12,000
Ram (Debtor) 9,000

I. Fill in the blanks with suitable words :
i. Inflow of money from sale of goods is called as __________ .
ii. Outflow of money to earn profit is called as __________ .
iii. Expense is incurred in order to earn __________ .
iv. Money spent in order to purchase assets is called __________ .
II. From the following identify revenues, expenses and expenditure.
i. Rent Received
32 ACCOUNTANCY
Introduction and
ii. Salaries Paid Basic Concepts
iii. Cost of Raw Material
iv. Furniture Purchased
v. Commission Received
vi. Insurance Premium Paid
vii. Machines Purchased Notes
viii. Advertising
III. Classify the given items into assets, liabilities, capital, revenue and
expense.
i. Stock-in-hand
ii. Rent Paid
iii. Advertising
iv. Creditors
v. Outstanding Expense (rent)
vi. Interest Received
vii. Capital Introduced
viii. Furniture and Fittings
ix. Insurance Premium Prepaid
x. Commission Received in Advance
xi. Debtors
xii. Dividend Received
xiii. Cash at bank
xiv. Salaries Paid
xv. Discount Received
xvi. Land and Building
IV. Multiple Choice Questions
i. Capital is the
a) Amount invested in business by people other than the owner.
b) Amount invested by the owners in the business.
c) Loan obtained by the business from bank.
d) Loan obtained by business from government.
ii. The accounting equation states that
a) Assets are equal to capital plus liabilities.
b) Assets are equal to capital minus liabilities.
c) Liabilities are equal to capital plus assets.
d) Capital minus liabilities is equal to assets.
iii. Out of the following which is not an external liability of the business:
a) Outstanding rent b) Bank loan
c) Capital d) Outstanding salary.
ACCOUNTANCY 33
Introduction and
Basic Concepts iv. Out of the following which is an item of expenditure.
a) Rent paid
b) Commission paid
c) Goods purchased
d) Furniture purchased
Notes v. Out of the following which is not an item of revenue:
a) Sale of goods.
b) Rent received.
c) Sale of old furniture.
d) Commission received.

Capital : Amount invested by the owner(s) in the business:
Drawing : Amount of cash or goods taken away by the owner for personal
use.
Liability : Obligations of the business.
External Liabilities : Obligations or amount which the business owes to
outsides.
Revenue : Inflow of money as a result of sale of goods or providing of
services.
Expense : Cost incurred in earning revenue.
Expenditure : Amount spent for purchase of assets.
Profit : Excess of revenue over expense.
Loss : Excess of expense over revenue.
Purchases : Acquisition of such goods or services in which the business
deals.
Sale : Exchange of merchandise either for cash or on credit to customer.
Stock : Value of merchandise available for sale, work in progress in the
manufacturing process, raw material.
Debtors : Customers to whom goods have been sold on credit & from
whom payment is to be received.
Creditors : Suppliers of goods from whom goods have been purchased on
credit and to whom payment is to be made.
TERMINAL EXERCISE
1. Define the following terms:
i. Capital
ii. Drawings
34 ACCOUNTANCY
Introduction and
iii. Debtors Basic Concepts
iv. Creditors
2. Define liability, revenue & expense.
3. What is meant by Double Entry Book Keeping?
4. Give any five examples of external liabilities.
5. With the help of examples give the meaning of internal and external liabilities. Notes
6. Give two examples each of the following:
i. Creditors for goods;
ii. Creditors for expenses;
iii. Creditors for loans.

3.1 I. i) liability ii) external, internal iii) internal
iv) external v) owners equity/capital
II. i) external ii) internal iii) internal iv) external
v) external vi) internal vii) external viii) external
ix) external x) internal
3.2 I. i) revenue ii) expense iii) profit iv) expenditure
II. i) revenue ii) expense iii) expense iv) expenditure
v) revenue vi) expense vii) expenditure viii) expense
III. i) asset ii) expense iii) expense iv) liability
v) liability vi) revenue vii) capital viii) asset
ix) asset x) liability xi) asset xii) revenue
xiii) asset xiv) expense xv) revenue xvi) asset
IV. i) b ii) a iii) c iv) d v) c
ACTIVITY FOR YOU
Visit a business organization in a nearby area and identify the different terms
which you have studied in this chapter.
ACCOUNTANCY 35

Kavya Madhavan
Enrolment No. 090008103065
Kavya Madhavan is a highly acclaimed actress in the Malayalam film world. Making
her debut as a child artiste, Kavya quickly managed to find a place in the hearts of
malayalees. However, all this was at the cost of dropping out of school at the Secondary
level. Like many others, she too nurtured a dream of acquiring a college degree.
Motivated to join the National Institute of Open Schooling (NIOS), Kavya Madhavan
appeared for the Senior secondary level examination in Malayalam medium and emerged
successful. But this was not achieved easily, she says.
Thanks to the Open Schooling system, Kavya Madhavan has now registered for B.Com in M.G. University,
Kottayam, Kerala.
Ganesh
Enrolment No. Secondary Course: 25001292005
Senior Secondary Course: 250012103570
Ganesh has cleared the Secondary course of NIOS with first division and has now
appeared in 4 subjects of Senior Secondary course. What differentiates Ganesh from
other students is that he is suffering from a non-healing ulcer of bone infection. There is
no treatment for his ailment; his lower part below the belt has not grown. The puss leaks
from his body continuously. He cannot move, and even has no sensation in the lower part of his body. He has
to be carried to be moved from one place to another.
However, support from his family members and the Chief Commissioner of Disabilities facilitated his enrollment
as a student under Sarva Shiksha Abhiyan as a private candidate, thereby enabling him to clear Class 5 and
Class 8. It was at this point that NIOS came to his rescue by providing the flexibility of studying at his own
pace through credit accumulation. He could also study subjects of his own choice and was further allowed to
appear for the examination in his house. UT Chandigarh continued to support him by providing him with the
facility of tutors, who taught him Maths and Science.
With a keen interest in religion, he has read about the various Puranas, Ramayana etc., from which he has
derived a lot of internal strength.
Ganesh is certainly determined to study further and wishes to pursue a course in Computer Science after
clearing his Senior Secondary course from the NIOS.
Notes
MODULE - II
25 60
Journal and Other Subsidiary Books

This module will help the students to understand the rules of Debit and Credit and
develop the skill of applying these rules in recording the transactions in journal and
other subsidiary books. It will also help them in preparing the different subsidiary
books such as Cash Book, Purchase Book, Sales Book, Purchase Return Book
and Sales Return Book.
Lesson 4 : Accounting Equation

Lesson 5 : Double Entry System
Lesson 6 : Journal
Lesson 7 : Cash Book
Lesson 8 : Bank Reconciliation Statement
Lesson 9 : Purchase and Sales Book
36 ACCOUNTANCY
MODULE - II
Journal and Other
Subsidiary Books
4
Notes
ACCOUNTING EQUATION
You have already studied about Dual Aspect Concept and the various basic Accounting
terms viz Assets, Liabilities, Capital, Expenses and Revenue. According to this concept,
every transaction affects the business in two ways by the same amount. Suppose, a
businessman starts his business with ` 3,00,000. In the books of accounts, `3,00,000
will be recorded as an asset (Cash) and equivalent amount will be shown as liability
towards the owner. In this example, you have noted that assets are equal to liabilities. We
can present it in mathematical form as Assets = Liabilities this mathematical expression
is called Accounting Equation.
Every transaction has its effect on the Accounting equation in such a manner that
both sides remain equal. Now, we shall take different business transactions and see
their subsequent effect on the accounting equation.
OBJECTIVES
state the meaning of accounting equation;
appreciate the importance of accounting equation;
point out the effect of each aspect of a transaction on the accounting equation;
establish that assets are equal to liabilities and capital and
prepare accounting equation from given transactions.
4.1 ACCOUNTING EQUATION
The recording of business transaction in books of accounts is based on a fundamental
equation called Accounting Equation. Whatever business possesses in the form of
assets is financed by proprietor or by outsiders. This equation expresses the
equality of assets on one side and the claims of outsiders (liabilities) and owners or
proprietors (capital) on the other side. Thus, an Accounting Equation is a mathematical
expression which shows that the assets and liabilities of a firm are equal. In
Mathematical form,
38 ACCOUNTANCY
Accounting Equation MODULE - II
Journal and Other
Whenever an asset is introduced in the business, a corresponding liability also appears. Subsidiary Books
A business does not have any amount of its own. Hence, we can say that
Business owns Nothing, And Owes Nothing, (In simple words it can be said that on
a particular date any business does not have neither any liability nor any asset of its
own)
Notes
What it owns and what it owes ?
Let us see the effect of business transactions on Accounting equation. These
transactions increase or decrease the assets, liabilities or capital. Every business
has certain assets. For example, Sunita started business by contributing
`2,00,000 as capital. It can be said that asset in the form of Cash has been
created for the business concern.
Hence, Cash = Capital
`2,00,000 = `2,00,000
Sunita later on purchases furniture for `20,000 and machinery for `60,000.
Now the position of the assets is a follows:
Capital = Cash + Furniture + Machinery
2,00,000 = 1,20,000 + 20,000 + 60,000
(2,00,000 80,000)
From the above business transactions, we find that
Capital = Assets
Or
Assets = Capital
Increase or decrease in capital will result in the corresponding increase or
decrease in assets. For example, Sunita introduces `50,000 as additional capital.
Then
Capital = Cash + Furniture + Machinery
2,00,000 = 1,20,000 + 20,000 + 60,000
+ 50,000 + 50,000
2,50,000 = 1,70,000 + 20,000 + 60,000

Every business concern, generally borrows money from outsiders in order to carry
on its activities. In other words, every business concern owes money to outsiders.
The assets are financed by the funds supplied by proprietors and outsiders. Money
borrowed from outsiders is called liability.
For example, Sunil started business by investing `5,00,000 and borrowed from
Ajay `1,00,000. Hence the amount of asset (cash) is `6,00,000. The accounting
equation of these two transactions will be :
ACCOUNTANCY 39
MODULE - II Accounting Equation
Journal and Other
Subsidiary Books Asset (cash) = Capital + Liability (Loan from Ajay)
6,00,000 = 5,00,000 + 1,00,000
The fact that business receives funds from proprietors and creditors and retains all of
them in the form of various assets, it can be presented in terms of an equation as
Notes Assets = Capital + Liabilities or A=C+L

Liabilities = Assets - Capital or L=A C
Capital = Assets - Liabilities or C =A L
Let us consider some more examples :
Rahul started business by introducing `3,00,000 as capital. He also invested
`2,00,000 which he borrowed from Shweta.
Assets = Capital + Liabilities (Loan from Shweta)
5,00,000 = 3,00,000 + 2,00,000
He purchases goods for cash `50,000
Assets = Capital + Liabilities
Cash + Goods
Old equation 5,00,000 = 3,00,000 + 2,00,000
effect of (-)50,000 + 50,000= 0
transaction
New Equation 4,50,000 + 50,000 = 3,00,000 + 2,00,000
He paid Shweta `50,000

Cash + Goods
Old equation 4,50,000 + 50,000 = 3,00,000 + 2,00,000
effect of (-) 50,000 + 0 = 0 (-)50,000
transaction
New Equation 4,00,000 + 50,000 = 3,00,000 + 1,50,000
In the above example, expenses and revenue have not been considered. They also
affect the accounting equation.
Every business concern has to meet certain expenses in its day-to-day operations
such as payment of salaries, rent, insurance premium, postage, wages, repairs
of machines, etc. These expenses are paid regularly. All expenses reduce the
cash balance as they are paid in cash. These expenses reduce the net income of
the business. As the net income is the income of proprietor, which is represented
by the capital account, so all expenses are deducted from the Capital account.
Similarly, every business concern receives certain revenues during its day to
day operations, such as rent received, commission received, etc. Revenue is
40 ACCOUNTANCY
Journal and Other
added to the cash balance as it is received in terms of cash. Revenue increases Subsidiary Books
the net income of the business and hence, it is added to the capital account.
Now, the Accounting Equation is represented by
+ revenue (cash) + revenue
- expenses (cash) - expenses Notes
Accounting equation is thus, affected by every business transaction. Any increase

or decrease in assets, liabilities and capital can be identified by preparing
accounting equation. It also shows that every business transaction satisfies the
dual aspect concept of accounting. It also serves as a basis for preparing the
Balance Sheet is also called as balance sheet equation.

I. Fill in the blanks with correct words :
i. Accounting equation is also called as ____________ equation.
ii. Asset = ____________ + Liabilities
iii. Accounting equation satisfies the ____________ concept of
accounting.
iv. Accounting equation serves as a basis for preparing
____________.
v. Capital = Assets - ____________
vi. Liabilities = ____________ - Capital.
i. In accounting equation, assets are equal to
a. Capital only
b. Capital + Liabilities
c. Capital Liabilities
d. Liabilities Capital
ii. Which of the following lists is a list of assets only?
a. Cash, Stock, Debtors, Machinery
b. Cash, Creditors, Loan
c. Capital, Furniture, Bill payable
d. Capital, Prepaid Expenses, Outstanding Expenses
iii. Which of the following lists is a list of liabilities only?
a. Cash, Stock, Debtors
b. Cash, Loan, Creditors
c. Creditors, Loan, Bank Overdraft, Bills Payable
d. Prepaid Rent, Salary, Outstanding Bills receivables
ACCOUNTANCY 41
Journal and Other
Subsidiary Books 4.2 EFFECT OF TRANSACTIONS ON ACCOUNTING
EQUATION
You have learnt that assets, liabilities and capital are the three basic elements of
every business transaction, and their relationship is expressed in the form of accounting
equation which always remains equal at any point of time, there can be a change in
Notes
the individual assets, liability or capital, but the two sides of the accounting equation
always remain equal. Let us examine this fact by taking up some more transactions
and see how these transactions affect the accounting equation.
Suppose, Rajni starts her business and the following transactions take place:
1. She started business with cash `5,00,000 introduced as capital.
Assets (cash) = Liabilities + Capital
Effect of the
transaction `5,00,000 = 0 + ` 5,00,000
This transaction means that `5,00,000 have been introduced by Rajni in terms of
cash, which is the capital for the business concern. Hence on one hand, the asset
(cash) has been created to the extent of `5,00,000.
2. She purchased furniture for cash worth `50,000
Cash + Furniture
Old equation 5,00,000 + 0 = 5,00,000 + 0
Effect of the
transaction (-) 50,000 + 50,000 = 0 - 0
New equation 4,50,000 + 50,000 = 5,00,000 + 0
This transaction has its effect only on the assets, as one asset has been purchased
against the other. In this transaction, furniture is purchased against cash.
Furniture and cash both are assets. Hence, furniture is increased by ` 50,000 and
cash is decreased by ` 50,000.
3. She purchased goods for cash `10,000
Cash + Furniture + Goods = Capital + Liabilities
Old equation 4,50,000 + 50,000 + 0 = 5,00,000 + 0
Effect of - 10,000 + 0 + 10,000 = 0 + 0
the transaction
New equation 4,40,000 + 50,000 + 10,000 = 5,00,000 + 0
Goods purchased is an asset and in return cash paid is also an asset.
42 ACCOUNTANCY
Journal and Other
Hence in this transaction, there is an increase in one asset (goods) and decrease in Subsidiary Books
the other asset (cash) by `10,000 leaving the capital and liabilities untouched.
4. She purchased goods from Rohit for `40,000
Asset = Capital + Liabilities (Rohit)
Cash + Furniture + Goods = Creditors
Old equation 4,40,000 + 50,000 + 10,000 = 5,00,000 + 0 Notes
Effect of transaction 0 + 0 + 40,000 = 0 + 40,000
New equation 4,40,000 + 50,000 + 50,000 = 5,00,000 + 40,000
In this transaction, goods have been purchased on credit from Rohit, hence there is
an increase in the assets (goods) by `40,000 as the business concern now owes
money to Rohit.
In any transaction, whenever cash payment is not mentioned and the name of the
seller is given, then the transaction is always a credit transaction.
5. She sold goods to Rahul for `20,000 costing `15,000.
Assets = Capital + Liabilities (Rohit)
Cash + Furniture + Goods + Debtors (Rahul)
Old equation 4,40,000 + 50,000 + 50,000 + 0 = 5,00,000 + 40,000
Effect of the
Transaction 0 + 0 15,000 + 20,000 = + 5,000 + 0
New equation 4,40,000 + 50,000 + 35,000 + 20,000 = 5,05,000 + 40,000
In this transaction, goods have been sold on credit to Rahul, so there is a decrease
in the assets (goods) by `15,000, and an increase in the assets Rahul (Debtors)
by `20,000 as money has to be collected from Rahul. In this process, the
proprietor has a gain of `5,000 which is added to the capital.
Whenever goods are sold and nothing about cash received is mentioned and the
name of the purchaser is given then that transaction is treated as credit transaction.
6. She paid salaries to clerks for `12,000
Old Equation 4,40,000 + 50,000 + 35,000 + 20,000 = 5,05,000 + 40,000
Effect of the - 12,000 + 0 + 0 + 0 = - 12,000 + 0
transaction
New Equation 4,28,000 + 50,000 + 35,000 + 20,000 = 4,93,000 + 40,000
In this transaction, salaries paid to clerks is an expense for the business concern.
Since salary is paid in terms of cash, hence cash as an asset is reduced by `12,000
and as all expenses reduce the capital, so capital is also reduced by `12,000.
ACCOUNTANCY 43
Journal and Other
Subsidiary Books 7. Cash paid to Rohit `20,000
Old Equation 4,28,000 + 50,000 + 35,000 + 20,000 = 4,93,000 + 40,000
Effect of the - 20,000 + 0 + 0 + 0 = 0 - (-) 20,000
transaction
Notes New Equation 4,08,000 + 50,000 + 35,000 + 20,000 = 4,93,000 + 20,000
In this transaction, cash has been paid to the creditors, (Rohit) `20,000, hence cash as
an asset is reduced by `20,000 and also the liability (Rohit) is reduced by `20,000.
From the above transactions, now you are clear as to how every transaction has its effect
on the accounting equation without disturbing the equality of the two sides.
4.3 COMBINATIONS OF THE EQUATION
The inter-relationship between assets, liabilities and capital can be expressed in various
forms. Nine combinations can be created.
Increase or decrease in one has a corresponding increase or decrease in itself or the
other.
Let us study the nine combinations with examples.
i) Increase in asset with corresponding increase in capital
Example : Started business with cash.
ii) Increase in asset with corresponding increase in liabilities.
Example : Goods purchased on credit.
iii) Decrease in asset with corresponding decrease in capital
Example : Cash withdrawn from the business by the proprietor for personal
use.
iv) Decrease in asset with corresponding decrease in liability
Example : Cash paid to the creditor.
v) Increase and decrease in assets
Example : Furniture purchased for cash, Goods purchased for cash, etc.
vi) Increase and decrease in liabilities
Example : Payment made to creditors by taking loan from bank.
vii) Increase and decrease in capital.
Example : Interest on Capital
viii) Increase in liabilities and decrease in capital.
Example : Wages due but not yet paid, outstanding salaries
ix) Increase in capital and decrease in liabilities.
Example : Conversion of loan (provided by the owner) into capital.
Let us consider another Illustration and study the accounting equation once again :
44 ACCOUNTANCY
Journal and Other
Rules for Accounting Equations Subsidiary Books
i. Capital : When capital is increased, it is credited (+) and when some part of
the capital is withdrawn, i.e., drawings are made, it is debited (-).
ii. Revenue : Owner's equty (Capital) is increased by the amount of revenue.
iii. Expenses : Owner's equity (Capital) is decreased by the amount of expenses.
iv. Outsider's Equity : When liabilities are increased, outsiders' liabilities are
Notes
credited (+).
v. Assets : If there is an increase in Assets, the increase is debited (+) in the
Asset Account. If there is decrease in Assets, the decrease in credited (-) in
the Asset Account.
vi. Effects of Outstanding Expenses : Increase in liabilities and decrease in
capital.
vii. Accrued Income : Increase in asset and increase in capital.
viii. Income Received in Advance : Increase in asset (as cash) and increase in
liabilities.
ix. Interest on Capital is an expense for the business, and thus, profit is reduced
by the amount and since interest on capital is an income for the owner it is
added to capital. So the net effect of this transaction is nil on capital.
x. Asset and Liabilities will not be affected by interest on capital and interest
on drawings.
Illustration 1 : Show the effect of following transactions on the Accounting Equation.
1. Shashi started business with : `
Cash 2,00,000
Goods 1,20,000
Machine 80,000
2. He purchased goods for cash 50,000
3. He sold goods (costing `20,000) 25,000
4. He purchased goods from Ravi 70,000
5. He paid cash to Ravi in full settlement 69,000
6. He sold goods to Vikas (costing `54,000) 60,000
7. He received payment from Vikas and discount
allowed `2,000 58,000
8. Salaries paid by him 40,000
9. Rent outstanding 4,000
10. Prepaid insurance 1,000
11. Commission received by him 3,000
12. Amount withdrawn by him for personal use 30,000
13. Interest on capital invested by him 2,000
ACCOUNTANCY 45
46
MODULE - II
Subsidiary Books
Journal and Other
Notes
Solution
S.No. Transaction Cash + Goods + Machine + Debtors + Prepaid = Creditors + Outstanding + Capital
expense expense
1. Started business 2,00,000 + 1,20,000 + 80,000 + 0 + 0 = 0 + 0 + 4,00,000

with
Cash ` 2,00,000
Goods ` 1,20,000
Machine ` 80,000
2. Goods purchased -50,000 + 50,000 + 0 + 0 + 0 = 0 + 0 + 0
for ` 50,000
New Equation 1,50,000 + 1,70,000 + 80,000 + 0 + 0 = 0 + 0 + 4,00,000
3. Sold goods (Cost
` 20,000) for ` 25,000 25,000 - 20,000 + 0 + 0 + 0 = 0 + 0 + 5,000
New Equation 1,75,000 + 1,50,000 + 80,000 + 0 + 0 = 0 + 0 + 4,05,000
4. Purchased goods 0 + 70,000 + 0 + 0 + 0 = 70,000 + 0 + 0
from Ravi ` 70,000
New Equation 1,75,000 + 2,20,000 + 80,000 + 0 + 0 = 70,000 + 0 + 4,05,000
5. Payment made to -69,000 + 0 + 0 + 0 + 0 = -70,000 + 0 + 1,000
Ravi in full
settlement ` 69,000
New Equation 1,06,000 + 2,20,000 + 80,000 + 0 + 0 = 0 + 0 + 4,06,000
6. Goods of ` 54,000 0 - 54,000 + 0 + 60,000 + 0 = 0 + 0 + 6,000
Sold for ` 60,000
New Equation 1,06,000 + 1,66,000 + 80,000 + 60,000 + 0 = 0 + 0 + 4,12,000
Accounting Equation
ACCOUNTANCY
7. Payment of ` 58,000 58,000 + 0 + 0 - 60,000 + 0 = 0 + 0 + -2,000
received from Vikas
and discount ` 2,000
is allowed
ACCOUNTANCY
New Equation 1,64,000 + 1,66,000 + 80,000 + 0 + 0 = 0 + 0 + 4,10,000
8. Salaries paid -40,000 + 0 + 0 + 0 + 0 = 0 + 0 - 40,000
` 40,000
Accounting Equation
New Equation 1,24,000 + 1,66,000 + 80,000 + 0 + 0 = 0 + 0 + 3,70,000

9. Rent Outstanding 0 + 0 + 0 + 0 + 0 = 0 + 4,000 - 4,000
` 4,000
New Equation 1,24,000 + 1,66,000 + 80,000 + 0 + 0 = 0 + 4,000 + 3,66,000
10. Prepaid Insurance -1,000 + 0 + 0 + 0 + 1,000 = 0 + 0 - 0
` 1,000
New Equation 1,23,000 + 1,66,000 + 80,000 + 0 + 1,000 = 0 + 4,000 + 3,66,000
11. Commission 3,000 + 0 + 0 + 0 + 0 = 0 + 0 + 3,000
received ` 3,000
New Equation 1,26,000 + 1,66,000 + 80,000 + 0 + 1,000 = 0 + 4,000 + 3,69,000
12. Amount with drawn -30,000 + 0 + 0 + 0 + 0 = 0 + 0 - 30,000
` 30,000
New Equation 96,000 + 1,660,000 + 80,000 + 0 + 1,000 = 0 + 4,000 + 3,39,000
13. Interest on Capital 0 + 0 + 0 + 0 + 0 = 0 + 0 + -2,000
` 2,000 +2,000
New Equation 96,000 + 1,66,000 + 80,000 + 0 + 1,000 = 0 + 4,000 - 3,39,000
Total 3,43,000 3,43,000
Notes
MODULE - II
Subsidiary Books
Journal and Other
47
Journal and Other
Subsidiary Books

Multiple Choise Questions
i. Goods purchased from Ritu for `60,000. What effect will the transaction
Notes have on the Accounting Equation?
a) Increase in assets and increase in liability.
b) Increase and decrease in asset.
c) Increase and decrease in liability.
d) Decrease in asset and decrease in liability.
ii. Rent outstanding ` 2,000. What effect will this transaction have on the
Accounting Equation?
a) Increase and decrease in asset.
b) Increase and decrease in liability.
c) Increase in liability and increase in asset.
d) Increase in liability and decrease in Capital.
iii. Interest on drawings amounted to `5,000. What effect will this transaction
have on the Accounting Equation?
a) Increase and decrease in asset.
b) Increase and decrease in liability.
c) Increase and decrease in Capital.
d) Increase in asset and Increase in liability.

Business transaction means exchange of goods and/or services for value
and any other financial activity undertaken in the course of the business.
Every business transaction is recorded on the basis of Accounting Equation.
Accounting equation is a statement showing the equality of assets on one
hand and the capital and liabilities on the other.
Assets = Capital + Liabilities (A = C + L)
Every business transaction has its effect on the Accounting Equation.
Business owns nothing and owes nothing. What it owns and what other
owes to business.
Under any circumstance, the equality of the Accounting Equation remains
same.
The effect of expenses and revenue is always on the Capital Account.
Expenses reduce the Capital and revenues increase it.
Every business transaction satisfies the Dual Aspect Concept.
48 ACCOUNTANCY
Journal and Other
Any increase or decrease in one element of Accounting Equation has a Subsidiary Books
corresponding increase or decrease on the other element or itself.
TERMINAL EXERCISE
1. Answer the following question in (1-10 words). Notes
i. If a firm borrows a sum of money, what will be its effect on the
Accounting Equation?
ii. Give two examples one showing the effect only on assets and
the other on liabilities only.
iii. How will you show income received in advance in the
accounting equation?
iv. If goods costing `. 8,000 are sold for ` 8,500, how will the
capital be affected?
2. Answer the following in (30-50 words)
i. What is an Accounting Equation?
ii. How are revenue and expense treated in Accounting Equation?
3. Accounting Equation remains intact under all circumstances Justify
this statement with the help of examples (100-150 words)
4. Prepare Accounting Equation on the basis of the following:
i. Karan started business with cash `1,60,000.
ii. He purchased furniture for cash `16,000.
iii. He paid rent `1,600.
iv. He purchased goods on credit `24,000.
v. He sold goods costing `16,000 for `40,000 for cash.
5. Akshay had the following transactions:
`
i. Commenced business with cash 2,50,000
ii. Purchased goods for cash 1,00,000
iii. Salaries paid 2,500
iv. Sold goods for cash `2,00,000 costing 1,50,000
v. Rent outstanding 500
vi. Purchased goods on credit 1,50,000
vii. Purchased Machinery on credit 25,000
viii. Purchased Motorcycle for personal use 25,000
ix. Purchased building for cash 1,00,000
Use Accounting Equation to show the effect of the above transactions
on the assets, liabilities and capital.
ACCOUNTANCY 49
Journal and Other
Subsidiary Books 6. Show the Accounting Equation on the basis of the following transactions :
`
i. Shivam Started business
Cash 5,00,000
Goods 2,00,000
Notes ii. He purchased machinery for cash 2,50,000
iii. He purchased goods from Ramesh 1,00,000
iv. He sold goods to Suresh (Cost `25,000) 30,000
v. Paid insurance premium 5,000
vi. Salary outstanding 10,000
vii. Depreciation of Machinery 25,000
viii. Interest on Capital 3,000
ix. Amount withdrawn for personal use 18,000
x. Interest on drawings 900
xi. Rent received in advance 1,500
xii. Cash paid to Ramesh 50,000
xiii. Cash received from Suresh 15,000

4.1 I. (i) balance sheet (ii) capital
(iii) dual aspect (iv) balance sheet
(v) liabilities (vi) assets
II. (i) b (ii) a (iii) c
4.2 (i) a (ii) d (iii) c
ACTIVITIES FOR YOU
Enquire from various business organisations and list various methods of
maintaining the record of transactions.
Write down ten business transactions and prepare the accounting equation
for them and ensure that they are equal at each and every step.
50 ACCOUNTANCY
MODULE - II
Journal and Other
5
Subsidiary Books
DOUBLE ENTRY SYSTEM Notes
As stated earlier, in accounting, transactions are recorded in a systematic manner.

But then what is that system. The system of accounting which has universal application
is termed as, double entry system. This system is based on the basic concept of
accounting i.e. dual aspect concept. In this lesson you will learn about double entry
system of accounting, accounts and their types, accounting vouchers and method of
preparing the vouchers.
OBJECTIVES
After going through this lesson you will be able to :
state the meaning of double entry systems of book keeping;
explain the advantages and limitations of double entry system;
classify the accounts in different catagories;
know the rules for debit and credit;
identify the source documents;
understand the meaning of accounting vouchers;
understand the different types of vouchers and
know the method of preparation of voucher.
5.1 MEANING OF DOUBLE ENTRY SYSTEM OF
BOOK-KEEPING
The double entry system of bookkeeping can be defined as the system of recording
transactions having two fundamental aspects - one involving the receiving of a benefit
and the other giving the benefit - in the same set of books. In this theory, as the two
fold aspects of each transaction are recorded, therefore it is called double entry
system.
As per dual aspect concept of accounting every transaction involves two aspects,
an aspect of receiving and an other aspect of giving. One who receives is a debtor
and one who gives is a creditor. Under the double entry system, both the aspects
of giving and receiving are recorded in terms of accounts. The account which
ACCOUNTANCY 51
MODULE - II Double Entry System
Journal and Other
Subsidiary Books receives the benefit is debited and the account which gives the benefit is credited.
It is the ultimate result of this system that every debit must have corresponding
credit and vice versa thus, on any particular day the total of the debit entries and
the credit entries on the various accounts must be equal.
For example, we bought machinery of ` 30,000 for business. It has brought two
Notes changes, machinery increases by ` 30,000 and cash decreases by an equal amount.
While recording this transaction in the books of accounts, both the changes must be
recorded. In accounting language, these two changes are termed as a debit change
& a credit change. Here machinery account will be debited and cash account will
be credited.
Thus, we see that for every transaction there will be two entries, one debit entry and
another credit entry. For each debit there will be a corresponding credit entry of an
equal amount. Conversely, for every credit entry there will be a corresponding debit
entry of an equal amount. So, the system under which both the changes in a transaction
are recorded together, one change is debited, while the other change is credited with
an equal amount, is known as double entry system of book- keeping. Double entry
system is based on the principle that Every debit has a credit and every credit has
a debit.
5.2 ADVANTAGES & LIMITATIONS OF DOUBLE
ENTRY SYSTEM
The main advantages of double entry system of book keeping are as follows:
1. The nominal aspects of transactions being recorded make it possible to
prepare Trading and Profit and Loss Account from which the Gross Profit
and Net Profit earned by the business during a particular period can be
easily ascertained.
2. As all personal accounts of debtors and creditors as well as real accounts
are kept, it is possible to prepare Balance Sheet.
3. The transactions being recorded in the most scientific and systematic way
give the most reliable information of business.
4. It prevents frauds because doing alterations in any account becomes difficult.
5. It enables the trader to compare the different items, such as sales, purchases,
opening stock and closing stock of one period with similar items of preceding
period and the trader may thus, know whether his business is progressing or
not.
6. Trial balance can be prepared on any day to prove the arithmetical accuracy
of accounting records.
52 ACCOUNTANCY
Double Entry System MODULE - II
Journal and Other
The main limitations of double entry system of book keeping are as follows: Subsidiary Books
1. This system requires the maintenance of a number of books of accounts
which is not practical in small concerns.
2. This system is costly because a number of records are to be maintained.
3. There is no guarantee of absolute accuracy of the books of accounts inspite
of agreement of the trial balance. Notes

Complete the sentences :
i. The Double entry theory of book-keeping is a system of recording
transactions having _________.
ii. One who receives is a ___________ and who gives is a _____________.
iii. The Double entry system prevents frauds by not rendering ___________.
iv. There is ____________ of absolute accuracy of the books of accounts
inspite of agreement of trial balance.
5.3 MEANING AND CLASSIFICATION OF ACCOUNTS
An accounting system records, retains and reproduces financial information relating
to financial transaction flows and financial position. Financial transaction flows
encompass primarily inflows on account of incomes and outflows on account of
expenses. Elements of financial position, including property, money received, or
money spent, are assigned to one of the primary groups i.e. assets, liabilities,
and equity.
Within these primary groups each distinctive asset, liability, income and expense is
represented by its respective account. An account is simply a record of financial
inflows and outflows in relation to the respective asset, liability, capital, income
and expense. It is a record of all business transaction relating to a particular person
or item. In accounting we keep a separate record of each individual, asset, liabilities,
expense or income. The place where such a record is maintained is termed as an
Account. Such as the Account of Madan, the Account of Brij, the Account of
Building, the Account of Rent, the Account of Discount and likewise. All transactions
entered into with Madan will be recorded in the Account of Madan and similarly,
all transactions relating to Brij will be recorded in the Account of Brij. Thus, an
account is a systematic record of transactions pretaining to a particular item or
person, which can be measured in terms of money during a particular period of
time. Account is a head under which particular type of transactions are consolidated,
classified and recorded. Example: A sales account is opened for recording the
sales of goods or services. Similarly expenses during the financial period are
ACCOUNTANCY 53
Journal and Other
Subsidiary Books recorded using the respective expense accounts. The account may be classified in
two ways:
i. Traditional classification
ii. Modern classification.
Classification of Accounts Based on Nature or Traditional Classification
Notes
On the basis of their nature accounts are of the following three types :
i) Personal Accounts : Accounts in the name of individuals or group of
individuals are called personal accounts e.g. Ramesh, Mahesh, M/s M.K.
Computers etc.
ii) Nominal Accounts : Accounts of expenses or losses incomes or gains are
called nominal accounts e.g. wages paid, commission received etc.
iii) Real Accounts : Accounts of assets are called real accounts e.g. building,
furniture etc.
Modern Classifications
On the basis of this classification accounts are divided into five catagories as given
below :
i. Capital, ii. Assets, iii. Liabilities, iv. Expenses and v. Income
Classification of Accounts
Traditional Concept Modern Concept
Real Personal Nominal Asset Capital Income

Accounts Accounts Accounts Accounts Accounts Accounts
Liabilities Expenses
Accounts Accounts
The further classification of accounts is based on the periodicity of their

inflows or outflows in the context of the accounting year.
Income is immediate inflow during the accounting year.
Expense is the immediate outflow during the accounting year.
An asset is a long-term inflow with implications extending beyond the financial
period.
Liability is long term outflow with implications extending beyond the financial
period.
54 ACCOUNTANCY
Journal and Other
5.4 RULES OF ACCOUNTING (DEBIT AND CREDIT) Subsidiary Books
Using Debit and Credit

In Double Entry accounting both the aspects of the transaction are recorded. Every
transaction has two aspects according to this system, both the aspects are recorded.
If the business acquires something, it must have been acquired by giving something Notes
else. While recording each transaction, the total amount debited must be equal to
the total amount credited. The terms Debit and Credit indicate whether the
transaction is to be recorded on the left hand side or right hand side of the account.
In its simplest form, an account looks like the English Language Letter T. Because
of its shape, this simple form of account is called T-account. You must have observed
that the T format has a left side and a right side for recording increases and decreases
in the item. This helps in ascertaining the ultimate position of each item at the end of
an accounting period. For example, if it is an account of a supplier, all goods/materials
supplied shall appear on the right (Credit) side of the Suppliers account and all
payments made on the left (debit) side.
In aT account, the left side is called debit (usually abbreviated as Dr.) and the right
side is known as credit (as usually abbreviated Cr.).
Account Title

(Left Side) (Right Side)

Specimen of T-account
Rules of Accounting
All accounts are divided into five categories for the purpose of recording of the
business transactions:
(i) Assets, (ii) Liability, (iii) Capital,
(iv) Expenses/Losses, and (v) Revenues/Gains.
Two Fundamental Rules are followed to record the changes in these accounts:
1. For recording changes in Assets/Expenses/Losses
Increase in Asset is debited, and decrease in Asset is credited.
Increase in Expenses/Losses is debited, and decrease in Expenses/ Losses
is credited.
2. For recording changes in Liabilities, Capital and Revenue/Gains
Increase in Liabilities is credited and decrease in Liabilities is debited.
Increase in Capital is credited and decrease in Capital is debited.
ACCOUNTANCY 55
Journal and Other
Subsidiary Books Increase in Revenue/Gains is credited and decrease in Revenue/Gain is
debited.
The rules applicable to the five kinds of accounts are summarised in the
following chart:
Rules of Accounting
Notes
Assets Expenses/Losses
(Increase) (Decrease) (Increase) (Decrease)
+ +
Debit Credit Debit Credit
Capital Liabilities Revenue/Gains
(Decrease) (Increase) (Decrease) (Increase) (Decrease) (Increase)

+ + +
Debit Credit Debit Credit Debit Credit
I. Analysis of Rule Applied to Assets Accounts

Rohit Purchased Furniture for ` 80,000.
Analysis of Transaction : In this transaction, the two affected accounts are Cash
account and Furniture account. Cash account is an assets account and has decreased.
As per rule if asset decreases the affected account is credited, so cash account
should be credited. Furniture is also an asset and it has increased. As per rule if asset
increases the affected account is debited thus, furniture account is to be debited.
Cash Furniture
Dr. Cr Dr Cr
80000 80000
(Decrease) (Increase)
II. Analysis of Rule Applied to Liabilities Accounts

Purchased Machinery for ` 60,000 on credit from M.B. Machinery Mart.
Analysis of Transaction : In this transaction, the two affected accounts are
machinery and M.B. Machinery Mart. Machinery is an asset, an asset has increased
therefore, machinery account is debited. M.B. Machinery Mart is the creditor on
account of supply of machinery and constitutes the liability for the buying firm which
has increased. Rule is that on increase of liability the concerned liability account is
credited and vice-versa, therefore M.B. Machinery Mart A/c is credited.
56 ACCOUNTANCY
Journal and Other
Machinery A/c M.B.Machinery Mart A/c Subsidiary Books
Dr Cr Dr Cr
60000 60000
(Increase) (Increase)
III. Analysis of Rule Applied to Capital Accounts Notes
Cash of ` 50,000 introduced in business as Capital by Suman Sharma.
Analysis of Transaction : In this transaction, the two affected accounts are Cash
account and Suman Sharma [Capital account]. Cash is an asset which increase
when invested in business as per rule if an asset increases it is debited therefore cash
account will be debited. Suman Sharma invested capital which increase the capital
account, and as per rule if capital increases it is credited therefore capital account
will be credited.
Cash A/c Capital A/c
Dr Cr Dr Cr
50000 50000
IV. Analysis of Rule Applied to Expenses/Losses Accounts
Paid `6000 to the employees as Salary.
Analysis of Transaction : In this transaction, the two affected accounts are Salary
account and Cash account. Salary account is an expense and has increased. As per
rule if expenses increase it will be debited. Cash is an asset and has decreased, as
per rule if assets decrease, it will be credited.
Salary A/c Cash A/c
Dr Cr Dr Cr
6000 6000
(Increase) (Decrease)
V. Analysis of Rule Applied to Revenue/Profit Accounts
Received interest for the month `4000.
Analysis of Transaction : In this transaction, the two affected accounts are Interest
and Cash. Interest is an item of Income and Cash an item of asset, as per rule if
revenue increases it will be credited and if asset increases it will be debited.
Cash A/c Interest A/c
Dr Cr Dr Cr
4000 4000
ACCOUNTANCY 57
Journal and Other
Subsidiary Books

I. Fill in the blanks:
i. On the basis of traditional classification accounts can be classified
Notes as
a) ___________ b) ___________ c) __________
ii. On the basis of Modern classification accounts can be classified as:
a) ___________ b) ___________ c) __________
d) _____________ e) ___________
iii. _________________ is immediate inflow while ____________ is
immediate outflow.
iv. Increase in assets is _______________ and decrease in Asset is
____________.
v. Left hand side of an account is called __________ and right hand
side of account is called _____________.
II. A list of the accounts is given below. Tick the category to which each
of the account belongs:
Type of Account
Name of Account Asset Liability Capital Revenue Expense
i. Wages
ii. Building
iii. Cash
iv. Gupta (Supplier)
v. Sharma (Owner)
vi. Sugam (Customer)
vii. Interest received
viii. Commission Earned
ix. Discount allowed
x. Rent Paid
Illustration 1
From the following transactions, state the titles of the accounts that will be affected,
types of the accounts and the account to be debited and the account to be credited:
58 ACCOUNTANCY
Journal and Other
Transaction ` Subsidiary Books
1. Ankur started business with cash 6,00,000
2 Purchased goods for cash 80,000
3. Paid salaries 10,000
Notes
4. Sold goods to Rohit on credit 60,000
5 Office machine purchased for cash 2,000
6 Ankur took loan from Bank 30,000
7 Ankur received commission 4,000
8. Paid for printing and stationary 500
9. Paid rent 6,000
10 Received cash from Rohit a debtor 60,000
Solution
Tran. Name of Type of Rules applicable to A/cs
No. Accounts Accounts in Debit/Credit items
of Increase/Decrease
1 2 1 2 1 2
1 Cash Capital Asset Capital Cash Capital
2 Purchases Cash Expense Asset Purchase Cash
3 Salaries Cash Expense Asset Salaries Cash
4 Rohit Sales Asset Revenue Rohit Sales
(Debtor) (Increase) (Increase)
5 Office Cash Asset Asset Office Cash
machine machine (Decrease)
(Increase)
6 Cash Bank Loan Asset Liability Cash Bank Loan
7 Cash Commission Asset Revenue Cash Commission
ACCOUNTANCY 59
Journal and Other
Subsidiary Books 8 Printing & Cash Expense Asset Printing and Cash
Stationary Stationery (Decrease)
(Increase)
9 Rent Cash Expense Asset Rent Cash
Notes (Increase) (Decrease)
10 Cash Rohit Asset Asset Cash Rohit
5.5 SOURCE DOCUMENTS

Accounting process begins with the origin of a business transaction and is followed
by analysis of such transaction. First, there should be a document showing that an
accounting event took place. Such a document is usually called a source document.
Source documents serve as a basis for an accounting entry. Source documents are
documents on the basis of which the accountants record accounting transactions.
Source documents are also called as business documents. Some examples of source
documents are invoices, material requisition forms, bank statements, cash memos,
receipts etc.
Each transaction in a business is supported by the documentary evidence, which are
considered source documents. Examples of source documents are an invoice shows
sale of goods on credit, a Cash Memo shows cash sales and the receipt issued by
the payee shows the transaction against cash payment etc. Thus, documents which
facilitate evidence of the transactions are known as the source documents. These
are the primary evidence in support of the concerned business transactions, and are
also termed as vouchers. Vouchers may be divided into two categories (a) Supporting
vouchers and (b) Accounting vouchers.
Supporting Vouchers
The vouchers which support the business transactions are called supporting vouchers.
Examples of supporting vouchers are: Rent receipt, Cash memo invoice etc
Accounting Vouchers
These are the source documents on the basis of which transactions are recorded in
the books of accounts. Accounting vouchers are the written documents containing
the analysis of business transactions for accounting and recording purposes prepared
by the accountants on the basis of supporting vouchers and signed by another
authorised person.
Features of an Accounting Voucher are as follows:
1. It is a written document.
2. It is the base for entries in the books of accounts.
60 ACCOUNTANCY
Journal and Other
3. It is prepared on the basis of evidence of the transaction. Subsidiary Books
4. It contains analysed information of a transaction so that the concerned
accounts could be debited and credited.
5. It is prepared by an accountant and countersigned by the authorised signatory.
5.6 TYPES OF ACCOUNTING VOUCHERS
Notes
Accounting vouchers may be classified as cash vouchers and non-cash vouchers.
There are two types of cash vouchers) debit vouchers and ii) credit vouchers. The
non-cash vouchers are also called as transfer vouchers.
Types of Accounting
Vouchers
Cash Voucher Non-Cash Voucher
Transfer Voucher
Debit Voucher Credit Voucher (For Non-Cash or credit
(For Cash Payment) (For Cash Receipts) Transactions)
Debit Voucher
Debit Vouchers are prepared for recording of transactions involving cash payments
only. Cash payments in the business are made on account of Payment to creditors,
Purchases of goods, Purchases of assets, Repayment of loans, Depositing cash into
Bank, Drawings & advances and expenses etc.
In case of all cash payments, one aspect is cash and the other is either the party to
whom the payment is made, or an expense or an item of property for which the
payment is made. A format of debit voucher is as follows:
(3) DEBIT VOUCHER
Hari Narayan & Sons

...................................
...................................
Received Rs. .............
Darya Ganj, New Delhi 100 002 (1)

Voucher No. 5 Date 10.6.2012 (2)
Amount (`)
Debit : Furniture A/c 10,000 (4)
(Being the furniture (6)
Purchased vide Cash
Memo No. 15) (9)
Revenue
Total 10,000
Stamp
Affix
(5)
Sd/- Sd/-
Manager Accountant
(10) (8) (7)
ACCOUNTANCY 61
Journal and Other
Subsidiary Books A Debit Voucher gives the following information:
1. Name and Address of the Organisation.
2. Date of Preparing the Voucher.
3. Accounting Voucher Number.
4. Title of the Account Debited.
Notes 5. Net Transaction Amount.
6. Narration, i.e., a brief decription of the transaction.
7. Signature of the Person Preparing it.
8. Signature of the Authorised Signatory.
9. Supporting Voucher Number.
10. A Document in lieu of the Supporting Voucher.
Illustration 2
The following transactions took place in M/s. Tarun Retailers. Prepare debit voucher:
2012 `
Jan. 1 Bought materials for cash vide Cash Memo No. 20 17,200
Jan. 5 Wages paid for the month of December 2011, wide
Wage Sheet No. 35 5,000
Solution :
(i) M/s. Tarun Retailers
...................................
...................................
Received Rs. .............
Voucher No. 1 Date 1.1.2012

Amount (`)
Debit : Purchases A/c 17,200
(Being the materials purchased vide
Cash Memo No. 20)
Revenue
17,200
Stamp
Sd/- Sd/-
Manager Accountant
M/s. Tarun Retailers

...................................
...................................
Received Rs. .............
(ii)
Amount (`)
Debit : Wages A/c 5,000
(Being wages paid for December 2011 vide
Wage Sheet No. 35)
Revenue
5,000
Stamp
Sd/- Sd/-
Manager Accountant
62 ACCOUNTANCY
Journal and Other
Illustration 3 Subsidiary Books
The following transactions took place in M/s. Sunil Traders. Prepare debit vouchers:
2012 `
Jan. 1 Bought furniture from Relax Furniture for cash vide
Cash Memo No. 24 9,500 Notes
Jan. 7 Wages paid for the month of December, 2011, vide
Wage Sheet No. 30 3,500
Jan. 10 Paid cash to Hari & Sons A/c vide Cash Receipt No. 70 5,000
Jan. 15 Paid for Postage 720
Solution :
M/s. Sunil Traders
...................................
...................................
Received Rs. .............

(i)
Amount (`)
Debit : Furniture A/c 9,500
(Being furniture purchased vide
Cash Memo No. 24)
Revenue
9,500
Stamp
Sd/- Sd/-
Manager Accountant
M/s. Sunil Traders

...................................
...................................
Received Rs. .............

(ii) Amount (`)
Debit : Wages A/c 3,500
(Being wages paid for December 2011
vide Wage Sheet No. 30)
3,500
Revenue
Stamp
Sd/- Sd/-
Manager Accountant
M/s. Sunil Traders

...................................
...................................
Received Rs. .............

(iii) Amount (`)
Debit : Hari & Sons A/c 5000
(Being amount paid vide Cash Receipt No. 70)
5000
Revenue
Stamp
Sd/- Sd/-
Manager Accountant
ACCOUNTANCY 63
Journal and Other
M/s. Sunil Traders
...................................
...................................
Received Rs. .............

Subsidiary Books
(iv) Voucher No. 4 Date 15.1.2012
Amount (`)
Debit : Postage A/c 720
(Being the amount paid for Postage)
Notes
720
Revenue
Stamp
Sd/- Sd/-
Manager Accountant
Credit Vouchers
These vouchers are prepared for recording of transactions involving only cash
receipts. Cash receipts in the business take place on account of Cash sales of goods,
Cash receipts from debtors, Cash sales of assets, Cash withdrawn from bank for
office use, Revenue income like interest, rent etc. received in cash, Loan taken and
Receipts of advances etc.
In all cash receipts, one aspect is cash and the other is either person or party from
whom cash is received or item of revenue on account of which cash is received or
the property on the sale of which cash is received. A format of credit voucher is as
follows:
(3) CREDIT VOUCHER
Ram Narayan Printers (1)

7, Karol Bagh, New Delhi
Voucher No. 302 Date 4.2.2012 (2)
Amount (`)
Credit : Sales A/c 12,000 (4)

(Being goods sold for (6)
cash vide
Bill No. 15) (9)
Total 12,000 (5)
Sd/- Sd/-
Manager Accountant
(8) (7)
The Credit Voucher gives the following information:

2. Date of Preparing the Voucher.
4. Title of the Account Credited.
5. Net Amount of the Transaction.
6. Narration, i.e., a brief description of the transaction.
64 ACCOUNTANCY
Journal and Other
7. Signature of the Person Preparing it. Subsidiary Books
Illustration 4
Prepare Credit Vouchers from the source vouchers of M/s. M.K. Computers, Notes
Paschim Vihar, New Delhi based on the following transactions:
2012 `
May 5 Sold Hard diskes for cash vide Cash Memo No. 10 72,000
May 16 Sold old Computer Monitor for cash vide cash
Memo No. 34 13,000
May 30 Withdrawn cash from Bank for office use vide
cheque No. 300407 8,700
Solution :
(i) M.K. Computers

Paschim Vihar, New Delhi
Voucher No. 1 Date : 5.5.2012

Amount (`)
Credit : Sales A/c 72,000

(Being the amount of Cash Sales vide
Cash Memo No. 10)
72,000
Sd/- Sd/-
Manager Accountant
(ii) M.K. Computers


Amount (`)
Credit : Old Computer Monitors A/c 13,000

(Being old Computer Monior sold for cash vide
Cash Memo No. 10)
13,000
Sd/- Sd/-
Manager Accountant
ACCOUNTANCY 65
Journal and Other
Subsidiary Books (iii) M.K. Computers

Amount (`)
Credit : Bank A/c 8,700

(Being Cash withdrawn from Bank vide
Notes Cheque No. 300407)
8,700
Sd/- Sd/-
Manager Accountant
Illustration 5
Prepare Credit Vouchers from the following information, gathered from supporting
vouchers of M/s. Genius Leather Stores, Meerut.
2012 `
(i) July 5 Received cash from Sohan & Co. on Account
vide cash receipt No. 35 12,000
(ii) July 10 Commission received vice cash receipt No. 74 3,500
(iii) July 15 Sold leather purses for cash vide
Cash Memo No. 412 4,500
(iv) July 24 Sold two old leather colouring machines vide
Solution :
(i) M/s. Genius Leather Stores, Meerut

Amount (`)
Credit : M/s. Sohan & Co. 12,000
(Being Cash received on account from Sohan & Co. vide
cash receipt No. 35)
12,000
Sd/- Sd/-
Manager Accountant
(ii) M/s. Genius Leather Stores, Meerut

Amount (`)
Credit : Commission A/c. 3,500
(Being the amount of commission received vide
3,500
Sd/- Sd/-
Manager Accountant
66 ACCOUNTANCY
Journal and Other
(iii) M/s. Genius Leather Stores, Meerut Subsidiary Books
Amount (`)
Credit : Sales A/c. 4,500
(Being the amount of cash sales vide
Cash Memo No. 412)
4,500 Notes
Sd/- Sd/-
Manager Accountant
(iv) M/s. Genius Leather Stores, Meerut

Amount (`)
Credit : Leather Colouring Machine 12,500
(Being two old leather colouring machine sold for cash vide
Cash Memo No. 3714)
12,500
Sd/- Sd/-
Manager Accountant
Transfer Voucher or Non Cash Voucher

Non cash vouchers refer to vouchers prepared for transactions not involving cash.
They are also called transfer vouchers. The transfer vouchers are prepared to record
non-cash transactions of the business involving Credit sales, Credit purchases,
Depreciation on assets, Return of goods purchased on credit, Bad debts, Return of
goods sold on credit etc.
These vouchers are prepared both in debit and credit forms simultaneously. A format
of Transfer Voucher is given as follows:
(3)
TRANSFER VOUCHER
Radhika Pearls Store (1)

32, Vikas Nagar, Lucknow
Voucher No. ....... Date 1.4..2012 (2)
Amount (`)
Debit : Machinery A/c ---------- (4a)
----------
Credit : Raman ---------- (4b)

(Being the machinery purchased (6)
vide Cash Memo No. ..........)
---------- (5)
Sd/- Sd/-
Manager Accountant
(8) (7)
ACCOUNTANCY 67
Journal and Other
Subsidiary Books A Non-Cash Voucher gives the following information:
2. Date of Preparing Voucher.
4. (a) Title of the Account Debited.
Notes (b) Title of the Account Credited.
5. Net Transaction Amount.
6. Narration, i.e., a brief description of the transaction.
7. Signature of the Person Preparing it.
Illustration 6
Prepare Transfer Vouchers of Sunny Garments, Kanpur from the source vouchers
based on the following transactions:
2012 `
Jan 3 Purchased goods from M/s. Jim & Joney vide Bill No. 20 47,000
Jan. 8 Sold goods to M/s. Sita Ram vide Invoice No. 4171 13,980
Solution:
Sunny Garments, Kanpur
Voucher No. .......... Date: 3.1.2012

Amount (`)
Debit : Purshases A/c 47,000
47,000
Credit : M/s. Jim & Joney 47,000

(Being goods purchased from M/s. Jim & Joney
vide Bill No. 20) 47,000
Sd/- Sd/-
Manager Accountant
Sunny Garments, Kanpur
Voucher No. .......... Date: 8.1.2012

Amount (`)
Debit : M/s. Sita Ram 13,980
13,980

(Being the amount of credit sales vide
Invoice No. 4171 to M/s. Sita Ram) 13,980
Sd/- Sd/-
Manager Accountant
68 ACCOUNTANCY
Journal and Other
Prepare a transfer Voucher from the following supporting voucher.
Ratan & Sones
Sale Invoice No. 121 Date : 15.3.2012
To
M/s. Naresh Brothers
Notes
Qty. Particulars Rate Amount

(`) (`)
120 Nos. Cricket balls 100 12,000
70 Nos. Full size bat 1000 70,000
82,000
Sd/-
Ratan & Sons
Solution :
Ratan & Sons
Amount (`)
Debit : M/s. Naresh Brothers 82,000
82,000
(Being the credit sales vide
Invoice No. 121 to M/s. Naresh Brothers) 82,000
Sd/- Sd/-
Manager Accountant
INTEXT QUESTIONS
5.3
I. Which of the following statements is true and which is false?
i. For every transaction there will be two entries.
ii. 'One who gives is a debtor and one who receives is a creditor'.
iii. A system is called double entry system because the two fold aspect
of each transaction are recorded.
iv. The totals of debit entries on any day need not be equal to credit
entries related to various accounts.
II. Put a mark against each transaction in the column of correct type of
voucher.
ACCOUNTANCY 69
Journal and Other
Subsidiary Books Debit Credit Transfer
Vouchers Vouchers Vouchers
1. Purchase furniture for cash
2. Sale of goods for cash
Notes
3. Sale of goods to Vikram
4. Depreciation charged on
Building
5. Withdrew cash from Bank
for office use.
III. Multiple Choice Questions

i. Which English alphabet is similar to the shape of an account?
a) I b) T c) H d) D
ii. How many sides does an account have?
a) One b) Two c) Three d) Four
iii. Where are all the transactions of a particular account recorded?
a) Under the particular account b) Under any account
c) Under more than two accounts d) Under many accounts
iv. Under how many heads accounts can be grouped under Modern
System of accounting:
a) Two b) Three c) Four d) Five
v. Treatment of assets account is similar to
a) Expenses b) Revenue c) Capital d) Liabilities

System under which both the changes in a transaction are recorded together,
one change is debited while the other change is credited with equal amount
is known as double entry system.
Account is a head under which particular type of transactions classified and
consolidated are recorded.
Traditional classifications of the accounts are as: personal, real and nominal.
On the basis of modern classification accounts are divided into assets,
liabilities, revenue, expense and capital.
Effects of debits and credits on various types of accounts.
70 ACCOUNTANCY
Journal and Other
Assets Expenses Subsidiary Books
Debit Credit Debit Credit
(increase) (decrease) (increase) (decrease)
+ - + -
Capital Liabilities Revenue Notes
Debit Credit Debit Credit Debit Credit
(decrease) (increase) (decrease) (increase) (decrease) (increase)
- + - + - +
Source Document and Vouchers: A document evidencing that an accounting

event took place is called source document i.e. cash memo, invoice, receipt,
Debit Note, Credit Note, Cheque and Pay-in slip.
A voucher is documentary evidence in support of a transaction. They are cash
voucher (Dr & Cr voucher) and transfer voucher for credit transaction.
TERMINAL EXERCISE
1. Define double entry system.
2. State various advantages of double entry system.
3. State the limitations of double entry system.
4. What is meant by an account?
5. Explain the modern classification of different types of Accounts.
6. State the fundamental rules, followed to record the changes (increase /
decrease) in various accounts.
7. What is accounting voucher? Explain in brief different types of accounting
vouchers.
8. Prepare debit vouchers from the following transactions:
i) Goods purchased for cash `1,50,000
ii) Cash paid to Raghav (creditor) `1,00,000
iii) Paid for office expense `15,000.
9. Prepare credit vouchers from the following transactions:
i) Additional capital introduced `2,00,000
ii) Compensation received from the Insurance company `50,000
iii) Drew cash for office from Bank `1,50,000
10. Prepare transfer vouchers from the following transactions:
i) Goods purchased from Mehta & Co. `25,000
ii) Sales return from customers `1,500
iii) Goods given as charity `3,000
ACCOUNTANCY 71
Journal and Other
Subsidiary Books 11. Prepare necessary accounting vouchers from the following transactions:
a) Goods sold to Salma on credit `8,000
b) Withdraw cash for personal use `5,000
c) Cash received from Bhoomi `15,000
d) Salary paid `5,000
e) Depreciation charged `7,000
Notes f) Cash deposited into Bank `10,000
12. Put the following on the proper side of Furniture Account:
`
Furniture purchased 20,000
Furniture sold 12,000
Furniture again purchased 6,000
Furniture discarded 1,500
A part of furniture worth ` 500 was broken 500
13. From the following data, prepare proprietors Capital Account:
`
Commenced business with Cash 30,000
Net loss as per Profit & Loss Account 4,000
Drawings during the year 5,000
Additional capital introduced during the year 3,000

5.1 i) dual aspect ii) debtor & creditor
iii) any alteration in an account iv) no guarantee
5.2 I. i) personal, real and nominal
ii) capital, liabilities, expense, revenue and assets
iii) assets, liabilities iv) debited, credited v) debit, credit
II. i) Wages Expense, ii) Building Asset, iii) Cash Asset,
iv) Gupta (Supplier) Liability, v) Sharma Owner Capital
vi) Sugam (Customer) Asset, vii) Interest received Revenue
viii) Commission earned Revenue,
ix) Discount allowed Expense, x) Rent Paid Expense.
5.3 I. i. False ii. False iii. True iv. False
II. i. Debit ii) Credit iii) Transfer iv) Transfer v) Credit
III. i) b, ii) b, iii) a, iv) d, v) a.
ACTIVITY FOR YOU
Draft a list of activities involving your monetary transactions of last week
and prepare vouchers from those transactions (atleast ten).
72 ACCOUNTANCY
MODULE - II
Journal and Other
6
Subsidiary Books
JOURNAL Notes
You have learnt that business transactions are recorded in various books of accounts
in a systematic manner. You have also learnt the double entry system of accounting.
Now, you would like to know what are those books of accounts? How are these
prepared? What transactions are recorded in each such book. One of these books
is Journal. This is a book which is prepared by every businessman small or big.
Business transactions are recorded in this book date wise and in the order in which
these transactions take place. In this lesson you will learn the meaning of journal, its
purpose and the method of preparing the journal.
OBJECTIVES
After studying this lesson you will be able to:
explain the meaning of journal with its purpose;
draw journal as per format;
explain the process of journalising;
journalise the simple and compound transactions and
classify journal into special journal and journal proper.
6.1 MEANING OF JOURNAL
Journal is a book of accounts in which all day to day business transactions are
recorded in a chronological order i.e. in the order of occurrence. Transactions
when recorded in a journal are known as entries. It is the book in which
transactions are recorded for the first time . Journal is also known as Book of
Original Record or Book of Primary Entry.
You have learnt that business transactions of financial nature are classified
into various categories of accounts such as assets, liabilities, capital, revenue
and expenses. All business transactions belonging to any of these categories
can be recorded in a journal. The process of recording transactions in the journal
is known as Journalising.
ACCOUNTANCY 73
MODULE - II Journals
Journal and Other
Subsidiary Books Small business units generally maintain one journal in which all the business transactions
are recorded. But in case of big business houses as the transactions are large in
number, the journal is divided into various books which are called special journals.
Different transactions are recorded in these books depending upon the nature of
transactions for example all credit sales of goods are recorded in Sales Book, all
Notes credit purchases of goods are recorded in Purchase Book and Cash transactions in
Cash Book and so on.
Purpose of Preparing Journal
1. It provides the date wise record of all the business transactions.
2. It gives complete information about a transaction at one place and also
provides an explanation of the transaction.
3. It helps in the understanding of the principles of Double Entry System
as entries in Journal are classified into Debit and Credit.
4. It is easier to post the entries of this book into ledger without any difficulty.
6.2 FORMAT OF JOURNAL
Every page of journal has the following format :
Journal
Date Particulars L.F. Dr. Amount Cr. Amount
` `
(1) (2) (3) (4) (5)
You see that journal is a columnar book. Each column is given a name which is
written on its top. Column wise details of journal is as follows :
1. Date: In this column we record the date of the transaction with its month
and accounting year. Year is written only once. Month is also written only
once for all the transactions belong to a particular month.
2. Particulars: The accounts affected by a transaction i.e. the accounts which
have to be debited and credited are recorded in this column. In the first line
write the name of the account to be debited against which Dr is written. In
the second line after leaving some space name of the account which has to
be credited is written. The word Tomay be prefixed with it. In the next line
narration is written. Narration is the explanation of a particular journal entry.
It should be short, complete and clear. A line is drawn before making the
next entry so as to separate the two.
Note : As per modern concept of Accounting you may write journal entry
even without writing 'To' for a credit entry.
3. Ledger folio: The transaction in the journal is posted in the ledger. Page
number of ledger on which the two accounts are opened is written in the
column of ledger folio.
74 ACCOUNTANCY
Journals MODULE - II
Journal and Other
4. Dr. Amount : In this column the amount to be debited is written against the Subsidiary Books
same line in which the debited account is written.
5. Cr. Amount : In this column, the amount to be credited is written against the
same line in which the credited account is written
You can understand the journalising of a transaction with the help of the following
example: Notes
2012
April 1 Commenced business with cash `10,000.
In this transaction two affected accounts are Capital A/c and Cash A/c.
The journal entry for the same will be.
Journal
` `
2012
April 1 Cash A/c Dr. 10,000
Capital A/c 10,000
(Business commenced
with cash)
At the end of each page the two columns are totalled and are carried forward to
the next page with words 'carried forward' (c/f). This total is written in the next
page on its top with words 'brought forward' (b/f).

I. Complete the sentences stating the meaning of journal
i. Journal is book of accounts in which ____________________.
ii. Narration is the ___________________________.
iii. Ledger folio column is used ________________________.
II. Following statements about journal are incorrect, correct them:
i. Only cash transactions are recorded in journal
ii. There is no other name of journal
iii. Every businessman big or small maintains one journal book.
6.3 PROCESS OF JOURNALISING
Following steps are taken while preparing a journal.
i) Identify the accounts : First of all the affected accounts of an accounting
transaction are identified. For example Goods of `5000 sold for cash
ACCOUNTANCY 75
Journal and Other
Subsidiary Books is a transaction. The affected accounts are Sales A/c and Cash A/c.
ii) Recognize the Account : Now the type of two accounts are ascertained
i.e. as asset, liability, capital, expense or revenue. In the given example
Cash A/c is an asset A/c and Sales A/c is a revenue A/c.
iii) Apply the rules of Debit and Credit : You have learnt the rules of Debit
Notes and Credit. Now ascertain which account is to be debited and which is to
be credited. In our example, sales account will be credited as sales (a revenue
item) is increasing and cash A/c will be debited as cash (is an asset) is also
increasing.
Now, the Journal entry will be recorded and narration will be written. Amounts will
be written against the two accounts in their respective columns.
Journal entry of the above given transaction will be recorded as follows:
Journal
` `
Cash A/c Dr. 5,000
Sales A/c 5,000
(Goods sold for cash)
Illustration 1
Analyse the following transactions using the Modern Approach for classification of
Accounts in a Tabular Form.
2012 `
Jan 1 Amogh started business with cash 50,000
Jan 2 Paid into Bank 20,000
Jan 4 Goods purchased for cash 10,000
Jan 8 Machinery purchased and paid by cheque 5,000
Jan 12 Sold goods to Pranaya 12,000
Jan 15 Purchased goods from Gunakshi 16,000
Jan 18 Sold goods for cash 8,000
Jan 20 Received cash from Pranaya 12,000
Jan 31 Withdrew cash for personal use 2,400
Jan 31 Rent Paid 2,000
76 ACCOUNTANCY
Journal and Other
Solution Subsidiary Books
Let us first analyze the transactions.
Tabular Analysis of Business Transactions
Date Transaction Affected Kinds of Increase/ Account to Account to Notes

Accounts Accounts Decrease be Debited be Credited
2012
Jan. 1 Cash Received Cash Asset Increase Cash A/c Capital A/c
from owner Capital Capital Increase
Amogh
Jan. 2 Paid into Bank Asset Increase Bank A/c Cash A/c
Bank Cash Asset Decrease
Jan. 4 Goods Purchases Expense Increase Purchases A/c Cash A/c
Purchased for Cash Asset Decrease
cash
Jan. 8 Machinery Machinery Asset Increase Machinery A/c Bank A/c
Purchased and Bank Asset Decrease
paid by cheque
Jan. 12 Sold goods to Pranaya Pranaya Increase Pranaya Sales A/c
Pranaya Sales (Debtor)
Sales Increase
(Revenue)
Jan. 15 Purchased goods Purchases Expenses Increase Purchases A/c Gunakshi
from Gunakshi Gunakshi Gunakshi Increase
(Creditor)
Jan. 18 Slod goods for Cash Asset Increase Cash A/c Sales A/c
cash Sales Revenue Increase
Jan. 20 Cash received Cash Asset Increase Cash A/c Pranaya
from Pranaya Pranaya Pranaya Decrease
(Debtor)
Jan. 31 Withdrew cash Drawings Capital Decrease Drawings A/c Cash A/c
for personal use Cash Asset Decrease
Jan. 31 Rend Paid Rent Expense Increase Rent A/c Cash A/c
Cash Asset Decrease
Illustration 2
On the basis of above analysis now you can prepare journal which will be as follows:
ACCOUNTANCY 77
Journal and Other
Subsidiary Books Journal of Amogh
` `
2012
Jan. 1 Cash A/c Dr. 50,000
Notes Capital A/c 50,000
(Capital brought in
by Amogh)
Jan. 2 Bank A.c ... Dr. 20,000
Cash A/c 20,000
(Cash paid into bank)
Jan. 4 Purchase A/c ... Dr. 10,000
Cash A/c 10,000
(Goods purchase for cash)
Jan. 8 Machinery A/c ... Dr. 15,000
Bank A/c 15,000
(Machinery purchased &
paid by cheque)
Jan. 12 Pranaya A/c ... Dr. 12,000
Sales A/c 12,000
(Goods sold on credit)
Jan. 15 Purchases A/c ... Dr. 16,000
Gunakshi 16,000
(Goods purchased on credit)
Jan. 18 Cash A/c ... Dr. 8,000
Sales A/c 8,000
Jan. 20 Cash A/c ... Dr 12,000
Pranaya A/c 12,000
(Cash received from
debtor Pranaya)
Jan. 31 Drawings A/c ... Dr. 2,400
Cash A/c 2,400
(Cash withdrawn for
personal use)
Jan. 31 Rent A/c ... Dr. 2,000
Cash A/c 2,000
(Rent paid)
1,47,400 1,47,400
78 ACCOUNTANCY
Journal and Other
Subsidiary Books

Given below are some transactions. Write the names and types of accounts
affected in the given debit and credit columns.
Dr. Cr. Notes
Transaction Name of A/c Type of A/c Name of A/c Type of A/c

i. Purchased goods
and paid by cheque.
ii. Paid salary.
iii. Cash received from
Apoorva a debtor.
iv. Goods sold to Maya
v. Cash withdrawn for
personal use.
Compound Entries
The journal entries which you have learnt so far affect two accounts only. There
can be entries that affect more than two accounts. Such entries are called
Compound or Combined entries. A compound entry contains more than
one debit or credit or both, for example :-
Cash paid for rent `2,000 and for salary `4,000.
The Affected accounts are Rent A/c which is to be debited and Salary A/c which
is also to be debited as both are items of expense and are increasing.
Cash A/c is to be credited as Cash A/c is an asset A/c and it decreases by
the total of Salary and Rent paid.
Journal entry
Rent A/c Dr. 2,000
Salary A/c Dr. 4,000
Cash A/c 6,000
(Cash paid for rent and salary)
Similarly cash paid to Vikram ` 4900. He allowed us discount `100. Journal entry
will be :
Vikram Dr. 5,000
Cash A/c 4,900
Discount A/c 100
(Cash paid to Vikram and discount allowed by him)
ACCOUNTANCY 79
Journal and Other
Subsidiary Books Thus, from the above examples you can understand that the entries having more
than one debit or credit are known as compound entries.
6.4 CLASSIFICATION OF JOURNAL
Journal is a book in which transactions are recorded in chronological order date
Notes wise, therefore, it will be practically difficult to record all transactions in journal if the
number of transactions are large. Hence, arises the need to divide journal into various
journals each called a subsidiary book or Special Purpose Book and the journal
itself is called Journal Proper. Following are the important subsidiary books (Journals)
used by a business enterprise :
i. Cash book
ii. Sale book
iii. Purchases book
iv. Sale Returns book on Returns Inward book.
v. Purchases Returns Book or Returns Outward book.
vi. Journal proper or General Journal.
Chart Showing the Classification of Journal
Journal
Special Journal Journal Proper
Cash Journal / Cash Book Goods Journal
Simple Bank Petty Purchases Sales Sales

Cash Column Cash Journal / Journal / Returns
Book Cash Book Book Book Journal /
Book Book
Purchases
Returns
Journal /
Book
80 ACCOUNTANCY
Journal and Other
Some basic transactions with their Journal Entries. Subsidiary Books
Journal Entries
Transactions Journal Entry
1. Purchase of goods on credit Purchases A/c ...Dr.
Supplier A/c Notes
2. Sale of goods of credit Customer's A/c ...Dr.

Sales A/c
3. Cash purchase of assets Sundry Assets A/c ...Dr.

Cash A/c
4. Started business with capital Cash A/c ...Dr.

Capital A/c
5. Collection of cash/cheque from Cash/Bank A/c (Net amount) ...Dr.

customers (and discount allowed, Discount Allowed A/c (Discount) ...Dr.
if any) Customer's A/c
6. Goods purchased for cash Purchases A/c ...Dr.

Cash A/c
7. Cash sales Cash A/c ...Dr.

Sales A/c
8. Opening a Bank Account Bank A/c ...Dr.

Cash A/c
9. Recovery of Bad Debt Cash A/c ...Dr.

Bad Debt Recovered A/c
10. For payment of cash/cheque to Supplier ...Dr.

suppliers (and discount received, Cash/Bank A/c (Net Amount)
if any) Discount Received A/c (Discount)
11. Bad Debts Bad Debts A/c ...Dr.

Customer's A/c
12. Distribution of goods as free Free Samples A/c /

samples. Advertisement A/c ...Dr.
Purchases A/c
13. Purchase of machinery for cash Machinery A/c ...Dr.

Cash A/c
ACCOUNTANCY 81
Journal and Other
Subsidiary Books 14. Depreciation charged on fixed Depreciation A/c ...Dr.
assets Asset A/c
15. Withdrawal of cash from bank Cash A/c ...Dr.

for business Bank A/c
Notes 16. Sale or disposal of any old asset Cash A/c ...Dr.
at a profit Asset A/c
Profit on Sale of Asset A/c
17. Giving goods or cash in charity Charity A/c ...Dr.

Cash A/c
Purchases A/c
18. Goods returned to the supplier Supplier's ...Dr.

Returns Outward A/c
19. Sale or disposal of any old asset Cash/Bank A/c ...Dr.

at a loss Loss on Sale or Assets A/c ...Dr.
Asset A/c
20. Goods returned by the customer Returns Inward A/c ...Dr.

Customer's A/c
Illustration 3
Journalise the following transactions in the books of Pranaya:
2012 `
Jan. 1 Commenced business with cash 50,000
Jan. 3 Paid into bank 25,000
Jan. 5 Purchased furniture for cash 5,000
Jan. 8 Purchased goods and paid by cheque 15,000
Jan. 8 Paid for carriage 500
Jan. 14 Purchased goods from Gaurav 35,000
Jan .18 Cash Sales 32,000
Jan. 20 Sold goods to Amol on credit 28,000
Jan. 25 Paid cash to Gaurav in full settlement 34,200
Jan. 28 Cash received from Amol 27,500
Discount allowed to him 500
Jan. 31 Paid rent for the month 2,000
Jan. 31 Withdrew from the bank for private use 2,500
82 ACCOUNTANCY
Journal and Other

` `
2012
Jan. 1 Cash A/c Dr. 50,000 Notes
Capital A/c 50,000
(Commenced business
with cash)
Jan. 3 Bank A/c Dr. 25,000
Cash A/c 25,000
(Cash paid in the bank)
Jan. 5 Furniture A/c Dr. 5,000
Cash A/c 5,000
(Purchased furniture
for cash)
Jan. 8 Purchases A/c Dr. 15,000
Bank A/c 15,000
(Purchased goods and
paid cheque)
Jan. 8 Carriage A/c Dr. 500
Cash A/c 500
(Cash paid for carriage
charge)
Gaurav 35,000
(Goods purchased on credit)
Sales A/c 32,000
Jan. 20 Amol Dr. 28,000
Sales A/c 28,000
(Goods sold to Amol on
credit)
C/F 1,90,500 1,90,500
ACCOUNTANCY 83
Journal and Other
Subsidiary Books B/F 1,90,500 1,90,500
Jan. 25 Gaurav Dr. 35,000
Cash A/c 34,200
Discount A/c 800
(Cash paid to Gaurav and
Notes discount allowed by him)
Discount A/c Dr. 500
Amol 28,000
(Cash received from Amol
and discount allowed to him)
Jan. 31 Rent A/c Dr. 2,000
Cash A/c 2,000
(Cash paid for rent)
Jan. 31 Drawings A/c Dr. 2,500
Bank A/c 2,500
(Cash withdrawn from bank
for domestic use)
2,58,000 2,58,000

Multiple Choice Questions
i. Purpose of preparing Journal is
a) To provide date wise record of all the business transactions.
b) To know Profit or Loss of business.
c) To know financial position of business.
d) To ascertain cash avaliability on a particular date.
ii. Compound Journal entry is an entry which
a) Contains more than one debit
b) Contains more than one credit
c) Contains more than one debit or credit or both.
d) Does not contain more than one debit or credit.
iii. Journal is also known as
a) Book of secondary entry.
b) Book of Primary entry.
c) Book of Primary and secondary entry.
84 ACCOUNTANCY
Journal and Other
iv. Journal can be classified as Subsidiary Books
a) Special Journal b) Journal Proper
c) Special Journal and Journal Proper d) None of the above
v. Narration of Journal entry is written in the column of
a) Date b) Particulars c) Dr amount d) Cr amount
Notes

Journal is a book of accounts in which all day to day business transactions
are recorded in a chronological order.
The process of recording transactions in journal is known as Journalising
Journal is divided into various journals so as to record different types of
transactions in different books. These may be Cash- Book, Purchases Book,
Sales book etc.
Format of Journal is:
` `
Steps in the process of journalising transactions

(i) Identify the Account.
(ii) Recognize the Account
(iii) Apply the rules of Debit and Credit
(iv) Write the amounts and narration
Entries that affect more than one Debit or Credit accounts are called
Compound entries.
When number of transactions are very large, journal is divided into various
types of journals so journals divided are called, Special journals or Special
purpose books or Subsidiary Books.
TERMINAL EXERCISE
1. What is meant by a journal?
2. Why is journal called book of original records?
3. Explain various steps in the process of journalising.
4. Explain the meaning of compound journal entries with an example.
5. Journalise the following transactions in the books of Arun.
ACCOUNTANCY 85
Journal and Other
Subsidiary Books 2012 `
Apr. 1 Commenced business with cash 80,000
Apr. 3 Paid into Bank 50,000
Apr. 6 Purchased goods for cash 20,000
Apr. 9 Purchased furniture and paid for it by cheque 15,000
Notes Apr. 14 Sold goods to Neha 18,000
Apr. 19 Purchased goods from Nirmal 24,000
Apr. 21 Withdraw cash for private use 8,000
Apr. 24 Received cheque from Neha 17,600
Allowed her discount 400
Apr. 26 Paid to Nirmal by cheque 16,300
She allowed discount 700
Apr. 27 Sold Goods to Maya for cash 80,000
Apr. 30 Paid Telephone bill 4,200
6. Journalise the following transactions in the journal of Mr. Ram Kumar.
`
Commenced business with cash 1,50,000
Purchased goods for cash 1,00,000
Purchased goods from Mohan on credit 26,000
Deposited into bank 15,000
Purchased furniture 72,000
Goods sold for cash 7,000
Goods sold to Kaushik on credit 5,000
Sale of old furniture 3,500
Received from Kamal 3,000
Paid salary 3,100
Paid Rent 4,200
Paid telephone bill 1,800
7. Journalise the following transactions in the books of Smt. Sheela.
`
Commenced business with cash 1,30,000
Paid into bank 21,000
Purchase goods 1,500
Withdrew cash from bank 3,000
Sold goods to Sharma 1,000
Purchased goods from Deepak 1,500
Received cash from Sharda 3,000
Paid to Malik 1,475
Rent paid 2,000
86 ACCOUNTANCY
Journal and Other
Salary paid to clerk 4,500 Subsidiary Books
Paid for postage 1,000
8. Journalise the following transactions.
2012 `
July 1 Commenced business with cash 2,00,000 Notes
July 2 Purchased goods on credit from Vivek 1,00,000
July 8 Sold goods for cash 22,400
July 9 Sold goods on credit to Ms/ Anuj & Co. 10,000
July 15 Paid to M/s Balbir Singh & Sons. 11,900
Discount allowed by them 100
July 25 Sold goods to M/s Balkrishan & Sons 5,600
July 27 Received cheque from M/s Anuj & Co.
in full settlement of amount due from them 9,750
July 31 Paid for electric charges 3,100
July 31 Paid Salary 2,000
July 31 Paid rent of building by cheque half of the building
is used by the proprietor for residential use 5,000
July 31 Withdrew for private use 3,500
9. The following are the transactions of Ranbeer Singh for the month of August.
You are required to journalise the same.
2012 `
Aug. 1 Started business with cash 2,80,000
Aug. 1 Cash paid into bank 50,000
Aug. 1 Bought stationery for cash 300
Aug. 2 Bought goods for cash 20,000
Aug. 3 Bought postage stamps 100
Aug. 5 Sold goods for cash 7,500
Aug. 6 Bought office furniture from Bhalla furnitures 25,000
Aug. 11 Sold goods to Bhatia Traders 10,000
Aug. 12 Received cheque from Bhatia Traders 10,000
Aug. 14 Paid Bhalla Furnitures 24,500
Aug. 16 Sold goods to Bharat Bhushan 50,000
Aug. 20 Bought goods from Seth & Bros. 27,000
Aug. 23 Bought goods for cash from Ram Narain & Co. 22,500
Aug. 24 Sold goods to Prakash Electric Store 3,500
Aug. 26 Bhatia Traders paid on account 8,000
Aug. 28 Paid Sethi & Bros. by cheque in full settlement 25,000
Aug. 31 Paid salaries to office staff 25,000
Aug. 31 Rent paid for shop 5,000
ACCOUNTANCY 87
Journal and Other
Subsidiary Books 10. Shivali Chadha commenced business on 1st January, 2012. Her transactions
for the month are given below. Pass necessary journal entries for the same.
2012 `
Jan. 1 Commenced business with cash 2,50,000
Jan. 2 Cash Paid into bank 35,000
Notes Jan. 3 Bought goods from Praveen Chauhan 54,000
Jan. 3 Sold goods to Rajesh Agarwal 48,000
Jan. 7 Bought goods from Ram Chand Sahai 16,450
Jan. 8 Paid wages in cash 8,000
Jan. 8 Sold goods to Manish Chugh 15,000
Jan. 10 Received cheque from Rajesh Agarwal 47,800
Jan. 10 Paid into bank 10,000
Jan. 11 Paid to Ramesh 7,000
Jan. 12 Paid rent 4,000
Jan. 13 Bought from Khanna & Khanna 17,400
Jan. 15 Paid Electricity bill 2,800

6.1 I. i. all transactions are recorded in chronological order.
ii. explanation of journal entry.
iii. to record page number of ledger on which journal entry is
posted.
II. i. All transactions are recorded in journal.
ii. Journal is also known as Day Book.
iii. Small businesses maintain one journal while big businesses
maintain different special journals.
6.2 i. Purchase - Expense - Bank - Asset
ii. Salary - Expenses - Cash - Asset
iii. Cash - Asset - Apporva - Asset
iv. Maya - Asset - Sales - Revenue
v. Drawing - Capital - Cash - Asset
6.3 i) a, ii) c, iii) b, iv) c, v) b.
ACTIVITY FOR YOU
Observe any ten activities, of a near by shop which can be termed as
transactions of business and record them on a page as journal.
88 ACCOUNTANCY
MODULE - II
Journal and Other
7
Subsidiary Books
CASH BOOK Notes
In the preceding lesson you have already learnt that business transactions are recorded
in Journal. In the case of a small business concern, where the number of business
transactions are less, the work relating to Journalizing of all business transactions is
easy. As the business grows, the number of business transactions increase and
recording all the transactions only in the Journal becomes very inconvenient and
cumbersome. It needs to be divided into many books. There are various kinds of
journals that are maintained where the transactions are recorded according to their
nature, such as Cash Book for cash transactions, Sales Book for credit sales of
goods; Purchase Book for credit purchases of goods and so on. In this lesson you
will learn about Cash Book, its meaning and preparation.
OBJECTIVES
understand the meaning of Cash Book;
enumerate the types of Cash Books;
state the meaning of and prepare a Simple Cash Book;
state the meaning and prepare a Cash Book with Bank Column and
describe the meaning of Petty Cash Book and its preparation.
7.1 MEANING OF CASH BOOK
Suppose you received your first salary in cash from your employer. Also you got
back some money that you had given to your friend as loan. You spent this money in
buying mobile phone and clothes and went to see movie with your friends. You
purchased some toys for your nephew. As per habit you noted down all receipts and
payments in your note book. At the end of the month, you may wish to calculate the
balance of cash in the note book and compared it with the actual cash balance with
you. You may maintain a separate book to record these items of receipts and
payments. Such a book will be known as Cash Book.
ACCOUNTANCY 89
MODULE - II Cash Book
Journal and Other
Subsidiary Books Cash Book is a book of account maintained for recording transactions involving
receipt and payment of cash. It is also one of the books of original entry. When a
cash book is maintained, cash transactions are not recorded in the Journal, and no
cash or bank account is required to be maintained in the ledger as Cash Book
serves the purpose of Cash Account also.
Notes 7.2 CASH BOOK: TYPES AND PREPARATION
Cash Books are of the following types:
Simple Cash Book.
Bank Column Cash Book.
Petty Cash Book.
Simple Cash Book
This records only cash receipts and cash payments. It has two sides, namely
debit and credit. Cash receipts are recorded on the debit side i.e. left hand side
and cash payments are recorded on the credit side i.e. right hand side. In a
simple cash book there is only one amount column each on its debit side and
on the credit side. The format of a Simple Cash Book is as under:
Format of a Simple Cash Book
Dr. Cr.
Receipts Payments
Date Particulars V. L.F. Amount Date Particulars V. L.F. Amount
No. (`) No. (`)
Column-wise explanation is as follows:

Date
In this column Year, Month and Date of transactions are recorded in
chronological order.
Particulars
The name of the account under which cash has been received or payment has
been made is written. Account pertaining to the receipts of cash is recorded on
the debit side and those pertaining to cash payments on the credit side.
Voucher No. (V. No.)
The document supporting a transaction is called a voucher. Generally, a voucher
has a serial number which is written in this column.
90 ACCOUNTANCY
Cash Book MODULE - II
Journal and Other
Ledger Folio Subsidiary Books
In this column is recorded the page number of the ledger book on which relevant
entry is posted.
Amount
Amount column on debit side records cash received where as, amount column
on credit side records cash payments. Notes
Steps in Preparation of Simple Cash Book
i. On the debit side in the particulars column, the name of the account, form
which cash is received, is recorded.
ii. On the credit side, in the particulars column the name of account for which
cash is paid, is recorded.
iii. In the amount column of debit side the amount of cash received is recorded
and in the amount column of credit side the amount of cash paid is recorded.
iv. At the end of the period, the total of the debit side of the cash book is
compared with the total of the credit side and the difference if any, is entered
on the credit side of the cash book under the particulars column as balance
c/d.
v. In case of Simple Cash Book, the total of debit side is generally more than
the total of the credit side, since the payment can never exceed the available
cash. The difference is written in the amount column and total of both the
sides of cash book becomes equal.
vi. The closing balance of the credit side if any becomes the opening balance
for the next period and is written as Balance b/d on the Debit side of the
Cash Book for the next period.
Illustration 1
Enter the following transactions in the cash book of M/s Ashok Traders:
Date Details Amount
2011 `
Dec. 01 Cash in Hand 30,000
Dec. 05 Cash received from Tanvi 12,000
Dec. 08 Insurance Premium Paid 2,500
Dec. 10 Furniture Purchased 7,000
Dec. 14 Sold Goods for cash 16,500
Dec. 18 Purchased Goods from Mithun for cash 26,000
Dec. 22 Cash paid to Yash 3,200
Dec. 25 Sold Goods to Vineet for cash 18,700
Dec. 28 Cash Deposited into Bank 6,000
Dec. 30 Rent paid 4,000
Dec. 31 Salary paid 7,000
ACCOUNTANCY 91
Journal and Other
Subsidiary Books Solution
Dr. Cash Book of M/s Ashok Traders Cr.
Receipts Payments
2011 No. ( ` ) 2011 No. (`)
Dec.01 Balance b/d 30,000 Dec. 08 Insurance
Notes
Dec.05 Tanvi 12,000 Premium A/c 2,500
Dec.14 Sales A/c 16,500 Dec. 10 Furniture A/c 7,000
Dec.25 Sales A/c 18,700 Dec. 18 Purchases A/c 26,000
Dec. 22 Yash 3,200
Dec. 28 Bank A/c 6,000
Dec. 30 Rent A/c 4,000
Dec. 31 Salary A/c 7,000
Dec. 31 Balance c/d 21,500
2012 77,200 77,200
Jan. 01 Balance b/d 21,500
Illustration 2
Record the following transactions in a Simple Cash Book of M/s Suresh & Co.
Date Details Amount
2012 (`)
Jan. 01 Cash in Hand 22,000
Jan. 05 Received from Ramesh (after allowing a discount ` 200) 3,000
Jan. 07 Paid Rent 300
Jan. 08 Sold Goods 3,000
Jan. 10 Paid Sanjay 7,000
Jan. 27 Purchased Furniture 2,000
Jan. 31 Paid Salaries 1,000
Solution
Dr. Cash Book of M/s Suresh & Co. Cr.
Receipts Payments
2012 No. ( ` ) 2012 No. (`)
Jan.01 Balance b/d 22,000 Jan. 07 Rent A/c 300
Jan.05 Ramesh 3,000 Jan. 10 Sanjay 7,000
Jan.08 Sales A/c 3,000 Jan. 27 Furniture A/c 2,000
Jan. 31 Salary 1,000
Jan. 31 Balance c/d 17,700
28,000 28,000
Feb.01 Balance b/d 17,700
Note : Jan. 05 entry of discount will not be shown in Cash Book but it will be
shown seprately in journal proper.
92 ACCOUNTANCY
Journal and Other
Record the following in the Cash Book of Ranveet and show the balance:
Date Details Amount
2012 (`)
Oct. 01 Balance of cash in hand 25,000 Notes
Oct.08 Purchased goods for cash from X 3,200
Oct. 15 Sold goods to Y 4,800
Oct. 20 Received commission 650
Oct. 20 Paid commission 550
Oct. 28 Paid to Suresh on account 7,150
Oct. 31 Paid salary to the office clerk `1,000and office rent ` 600
Solution
Cash Books of Ravneet
Dr. Cr.
Receipts Payments
2012 No. ( ` ) 2012 No. (`)
Oct. 1 Balance b/d 25,000 Oct. 8 Purchases A/c 3,200
Oct.20 Commission A/c 650 Oct. 20 Commission A/c 550
Oct. 28 Suresh 7,150
Oct. 31 Salary A/c 1,000
Oct. 31 Office Rent A/c 600
Oct. 31 Balance c/d 13,150
25,650 25,650
Nov.1 Balance b/d 13,150
Note : Transaction dated Oct. 15 has not been recorded in the cash book because
it is a credit transaction.

Fill in the blanks :
i. Simple cash book records only cash ______and cash _____
ii. In a simple cash book all ______ are recorded in debit side and all
_______ are recorded in credit side.
iii. The total of _______side of the simple column cash book is generally more
than the total of its _____side.
iv. Closing balance of cash book becomes the _______ balance of next
period.
ACCOUNTANCY 93
Journal and Other
Subsidiary Books Illustration 4
Prepare Cash Book of Kuldeep for the month of April 2011 from the following
particulars :
Date Details Amount
Notes 2012 (`)
Apr. 01 Cash in hand 17,600
Apr. 03 Purchased Goods for cash from Santosh 7,500
Apr. 06 Sold Goods to Rohit 6,000
Apr. 10 Wages paid in cash 500
Apr. 15 Cash paid to Naveen 3,500
Apr. 17 Cash sales 10,000
Apr. 19 Commission paid 700
Apr. 21 Cash received from Tanya 1,500
Apr. 25 Furniture Purchased for cash 1,700
Apr. 28 Rent paid 3,000
Apr. 30 Paid Electricity bill in cash 1,300
Solution
Cash Book of Kuldeep
Dr. Cr.
Receipts Payments
2012 No. ( ` ) 2012 No. (`)
Apr. 1 Balance b/d 17,600 Apr. 03 Purchases A/c 7,500
Apr.17 Sales A/c 10,000 Apr. 10 Wages A/c 500
Apr.21 Tanya 1,500 Apr. 15 Naveen 3,500
Apr. 19 Commission A/c 700
Apr. 25 Furniture A/c 1,700
Apr. 28 Rent A/c 3,000
Apr. 30 Elect. Bill A/c 1,300
Apr. 30 Balance c/d 10,900
29,100 29,100
May 01 Balance b/d 10,900
Note: Credit transactions are not recorded in cash Book (i.e. a credit sales to Rohit
`6000 on April 6, 2012).
Illustration 5
Naresh started a business with `20,000 on 1st April 2012. Out of this he deposited
`15,000 into his Bank Account. His cash transactions during the week were:
94 ACCOUNTANCY
Journal and Other
Date Details Amount Subsidiary Books
2012 (`)
Apr.01 Purchased stationery for cash 100
Apr.01 Purchased goods for cash 2,500
Apr.02 Cash sales 1,500
Apr.03 Cash Received from Shiv on account 1,000 Notes
Apr.04 Paid to Ram 2,200
Apr.05 Paid for advertisement 400
Apr.06 Cash sales 1,800
Apr.06 Purchased old machinery for cash 800
Solution
Cash Book of Naresh
Dr. Cr.
Receipts Payments
2012 No. ( ` ) 2012 No. (`)
Apr. 01 Capital A/c 20,000 Apr. 01 Bank A/c 15,000
Apr. 02 Sales A/c 1,500 Apr. 01 Stationery A/c 100
Apr. 03 Shiv 1,000 Apr. 01 Purchases A/c 2,500
Apr. 06 Sales A/c 1,800 Apr. 04 Ram 2,200
Apr. 05 Advertisement A/c 400
Apr. 06 Machinery A/c 800
Apr. 06 Balance c/d 3,300
24,300 24,300
Apr. 07 Balance b/d 3,300

I. Multiple Choice Questions
i. Simple Cash Book generally shows :
a) Debit or Credit balances b) Credit balance
c) Debit balance d) Both the balances
ii. Cash book is a :
a) Subsidiary journal b) Subsidiary journal and ledger
c) Ledger only d) None of these
iii. Cash sales are recorded in :
a) Sales book b) Cash book
c) Journal d) None of these
iv. The Cash Book records :
a)All cash receipts & payment b) Cash and credit sales of goods
c) Only cash receipts d) None of these
ACCOUNTANCY 95
Journal and Other
Subsidiary Books v. The balance in the Cash Book is :
a) An expense b) A profit c) An asset d) A liability
vi. If Sonu has sold goods for cash, the entry will be recorded :
a) In the Cash Book b) In the Sales Book
c) In the proper Journal d) None of the above
vii. Cash Book is a part of :
Notes
a) Journal b) Ledger
c) both Journal & Ledger d) None of the above
II. Some transactions are given below. On which side of the Cash Book
would you record them? Put the tick mark in appropriate column.
S.No. Transactions Debit Side Credit Side
(i) Mukesh started business
with cash
(ii) Goods purchased for cash
(iii) Goods sold for cash
(iv) Closing cash balance
(v) Cash received from Ankur
7.3 BANK COLUMN CASH BOOK

When the number of bank transactions are large in an organization, it is necessary to
have a separate book to record bank transactions. Instead of having a separate
book to record Bank transactions, a Bank column is added on each side of the
Simple Cash Book. This type of cash book is known as Bank column Cash
Book. All payments into Bank are recorded on the debit side and all withdrawals
/ payments through the Bank are recorded on the credit side of the cash book.
The format of a Bank column Cash Book is as under:
Format of a Bank Column Cash Book
Dr. Cr.
Receipts Payments
Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
(`) (`) (`) (`)
Accounting Technique
i) Payment in cash or by cheque : Payment by cheque will be entered in the
Bank column and those payments made in cash will be written in the cash
column, on the credit side.
96 ACCOUNTANCY
Journal and Other
ii) Received Cash or Cheque : Cheque received will be recorded in the Subsidiary Books
Bank column and cash received will be recorded in the cash column,
on the debit side.
iii) Cash withdrawn from Bank : There are two accounts involved in it. Firstly,
the amount of cash at bank will reduce and secondly the amount of cash in
hand will increase. It will first be written on the debit side in the cash column Notes
and then on the credit side in bank column. This is because both the accounts
involved in this transaction are there in this Cash Book viz. Cash Account
and Bank Account. As per double entry system one account will be debited
and the other account will be credited. Cash in hand is increasing and Cash
at Bank is decreasing. Therefore, on the credit side in the particulars column
By Cash will be written and the amount will be entered in the bank column,
on the debit side in the particulars column To Bank will be written and the
amount will be entered in the Cash Column. This is called a Contra-
Entry i.e., entry in both sides of the Cash Book once in the Cash Column
and once in the Bank Column. This fact is denoted by writing letter (C) in
the L.F. columns on both sides.
iv) Cash Paid-into Bank : This will also be recorded through a contra entry
as explained above. Here also there are two accounts involved Cash in
hand and Cash at Bank. First of all amount of cash in hand will reduce
and secondly the amount of cash at bank will increase. Both these accounts
are there in this Cash Book. Cash at bank is increasing therefore, the
amount will be written in the bank column on the debit side by writing To
Cash in the particulars column. Cash in hand is reducing therefore, the
amount will be written in the cash column on the credit side by writing By
Bank in the particulars column. As it is a contra entry letter (C) will be
written in the L.F. column on both sides.
v) Dishonors of a Cheque : (a) If any cheque sent to the bank is dishonored
and is sent back by the bank, its amount will be entered in the bank
column on the credit side. In the particulars column the name of the
party, who gave the cheque, will be written. (b) If any cheque issued by
the firm to a creditor is dishonored and is returned by the creditor, it
will be entered in the bank column on the debit side. The name of the
creditor will be written in the particulars column.
vi) Bank Charges : Bank charge some money for the services provided by it.
Every half year some amount is charged by them. This amount will be
written in the bank column on the credit side because cash at bank is reduced.
In the particulars column By Bank Charges Account will be written.
vii) Cheques Received but not Sent to Bank : Such cheques should be
crossed and kept under lock and key and should be straight away entered
ACCOUNTANCY 97
Journal and Other
Subsidiary Books into bank column the next day when it is sent to bank. As the cheque is
crossed, there is no danger of its being misused. This is the best course.
However, if the cheque is treated as cash and is entered in the cash
column on the day it is received, the cash in hand will increase which
will be different from the actual cash in hand. This is not desirable.
Notes Moreover, next day it will have to be sent to the bank by passing a
contra-entry. This increases the work unnecessarily. Therefore, the first
approach is the best.
viii) Endorsement of cheque : If a received cheque is to be endorsed, then it
is not deposited in bank account but is to be recorded in cash column Dr.
side of Cash Book and simultaneously in cash column Cr side of Cash
Book.
ix) Balancing the Cash Book : Both the cash column and the bank column
will be balanced.
a. Total of the debit side of Cash column will generally be more
than the total of credit side of cash column. It will be totalled first
and the same total will be written just opposite to it in the cash
column on the credit side. The balance will be calculated on the
credit side above the total by writing By Balance c/d in the
particulars column. This balance will be carried forward to the
next date and will be taken to the debit side below the total and
To Balance b/d will be written in the particulars column.
b. In case of bank column, the total of any side may be more. In case
the debit side bank column is more, it means that there is a balance
in the bank. The balancing will be done just in the same way as in
the case of cash column as described above.
If the total of credit side bank column is more this means that there is an overdraft
from the bank. In this case first total the bank column on the credit side. Then put the
same total in the bank column on the debit side in front of each other. The balance
will be calculated on the debit side above the total and phrase, To Balance c/d will
be written in the particulars column. This balance of overdraft will be carried to the
next date on the credit side below the total of the bank column and the phrase By
Balance b/d will be written in the particulars column.
Illustration 6
Enter the following transactions in the Two Column Cash Book of Ratan for the
month of June 2012 :
98 ACCOUNTANCY
Journal and Other
Date Detail Amount Subsidiary Books
2012 (`)
June 1 Balance of Cash in hand 12,000
June 1 Balance of Cash at Bank 1,80,000
June 2 Bought goods by cheque 15,000
June 4 Bought goods by cash 8,000 Notes
June 5 Cash Sales 28,000
June 8 Sold goods by cheque 10,000
June 9 Paid wages in cash 400
June 15 Paid salaries by cheque 8,000
June 20 Paid cash into Bank 20,000
June 21 Paid for stationery by cheque 1,200
June 21 Paid to Naresh by cheque 1,280
June 22 Cash purchases 8,000
June 23 Received a cheque from Gopal and deposited
the same into bank 1,880
June 24 Withdrew cash from bank 35,000
June 26 Drawings in cash for personal use 4,000
June 28 Purchases by cheque 9,500
June 29 Received cheque from Sohan 4,600
June 30 Paid rent by cheque for the month 1,200
Solution
Cash Book of Ratan
Dr. Cr.
Receipts Payments
Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
2012 (Rs.) (Rs.) 2012 (Rs.) (Rs.)
June1 Balance b/d 12,000 1,80,000 June2 Purchase A/c --- 15,000
June5 Sales A/c 28,000 June4 Purchase A/c 8,000
June8 Sales A/c 10,000 June9 Wages A/c 400
June20 Cash A/c (C) 20,000 June15 Salaries A/c 8,000
June23 Gopal 1,880 June20 Bank A/c (C) 20,000
June24 Bank A/c (C) 35,000 June21 Stationery A/c 1,200
June29 Sohan 4,600 June21 Naresh 1,280
June22 Purchase A/c 8,000
June24 Cash A/c (C) 35,000
June26 Drawings A/c 4,000
June28 Purchases A/c 9,500
June30 Rent A/c 1,200
June30 Balance c/d 34,600 1,45,300
75,000 2,16,480 75,000 2,16,480
July 1 Balance c/d 34,600 1,45,300
ACCOUNTANCY 99
Journal and Other
Subsidiary Books 7.4 PETTY CASH BOOK
The Business enterprises which prefer to maintain Bank column cash book feel
the necessity of having another Cash book for recording small payments. A
large number of repetitive small payments such as, for conveyance, cartage,
postage, telegrams, courier and other expenses are made. These organizations
Notes
appoint an assistant to the Head Cashier. The appointed assistant is known as
petty cashier. He makes payments of these expenses and maintains a separate
cash book to record these transactions. Such a cash book is called Petty Cash
Book.
The petty Cash Book is generally prepared on imprest basis. Under this system initially
a fixed amount is given to the petty cashier. He makes the petty payments out of this
amount. When he uses approximately the whole amount he hands over the payment
vouchers to the main cashier and the main cashier reimburses the total amount of
payments to the petty cashier. The format of the petty Cash Book is given below:
Date Particulars Amt. Conveyance Cartage Postage Telegram RefreshmentC o u r i e r Total
(`) (`) (`) (`) (`) (`) (`) (`)
Illustration 7
On 1.1.2012 an imprest of `500 was given by the main cashier to the petty cashier.
The petty cashier made the following payments:
Date Detail Amount
2012 (`)
Jan 1 Paid Conveyance 130
Jan 2 Paid for refreshments 45
Jan 3 Paid for postage stamps 45
Jan 15 Paid for courier 35
Jan 17 Paid for telegram 25
Jan 18 Paid for cartage 12
Jan 20 Paid for conveyance 21
Jan 21 Paid cartage 57
Jan 27 Paid for refreshment 28
Jan 28 Paid for Courier 14
Prepare a Petty Cash Book.
100 ACCOUNTANCY
Journal and Other
Petty Cash Book
Date Particulars Amt. Conveyance Cartage Postage Telegram Refreshment Courier Total
2012 (`) (`) (`) (`) (`) (`) (`) (`)
Jan.1 Cash 500
Jan.1 Coneveyance 130 130
Notes
Jan.2 Refreshment 45 45
Jan.3 Postage Stamp 45 45
Jan.15 Courier 35 35
Jan.17 Telegram 25 25
Jan.18 Cartage 12 12
Jan.20 Conevyance 21 21
Jan.21 Cartage 57 57
Jan.27 Refreshment 28 28
Jan.28 Courier 14 14
Jan.28 Total 500 151 69 45 25 73 49 412
Balance 88
500 500
Jan.29 Balance b/d 88
Feb.01 Cash 412

Fill in the blanks with suitable word/words:
i. In Bank column cash book , Bank and _________ columns are shown on
each side.
ii. The Bank column cash book records transactions relating to _______as
well as _______.
iii. A separate cash book maintained to record small transactions is
called___________.

Cash Book is a Book in which all cash receipts and cash payments are
recorded. It is also a book of original entry.
Type of Cash Book
Simple Cash Book Bank Column Cash Book Petty Cash Book
ACCOUNTANCY 101
Journal and Other
Subsidiary Books Simple Cash Book
A Simple Cash Book records only cash receipts and cash payments. It has
two sides, namely debit and credit.
Bank Column Cash Book
In this type of Cash Book, Bank and Cash columns are shown on
Notes each side.
Petty Cash Book : In business organizations, a large number of repetitive
small payments such as, for conveyance, cartage, postage, telegrams and
other expenses are made. These organizations appoint an assistant to the
Head Cashier. The so appointed cashier is known as petty cashier. He makes
payment of these expenses and maintains a separate cash book to record
these transactions. Such a cash book is called Petty Cash Book.
TERMINAL EXERCISE
1. What is meant by a Cash Book? Explain the types of Cash Book.
2. What is meant by a Bank Column Cash Book ? Draw the format of
Bank Column Cash Book.
3. What do you mean by Petty Cash Book?
4. State the meaning of a Contra Entry with the help of an example.
5. Enter the following transactions in the Simple Cash Book of M/s Ronark
Traders:
Date Details Amount
2012 (`)
Jun. 01 Started Business with cash 30,000
Jun. 02 Goods purchased for Cash 10,000
Jun. 03 Furniture Purchased 1,000
Jun. 06 Goods Sold for Cash 7,000
Jun. 09 Cartage Paid 200
Jun. 10 Postage Paid 100
Jun. 12 Cash Sales 3,000
Jun. 14 Cash withdrawn for Personal use 2,000
Jun.18 Deposited into Bank 10,000
Jun. 22 Goods purchased for Cash 13,000
Jun. 25 Wages paid 500
Jun. 27 Rent Paid 3,000
Jun. 28 Cash Sales 2,000
102 ACCOUNTANCY
Journal and Other
6. Enter the following in Srinaths cash book and show the balance: Subsidiary Books
Date Details Amount
2012 (`)
Oct. 01 Balance of cash in hand 25,000
Oct. 08 Purchased goods for cash from X 3,200
Oct. 15 Sold goods to Y 4,800 Notes
Oct. 20 Received commission 650
Oct. 20 Paid Commission 550
Oct. 28 Paid to Suresh on account 7,150
Oct. 31 Paid salary to the office clerk 1,000
and office Rent 600
7. From the following transactions prepare Simple Cash Book:
Date Details Amount
2012 (`)
Mar.01 Cash in Hand 32,500
Mar. 08 Cash paid to Sumit 8,000
Mar. 12 Goods Purchased 3,000
Mar. 15 Cash received from Nidhi 2,000
Mar. 18 Cash Sales 4,000
Mar. 22 Paid Wages 4,000
Mar. 25 Salary Paid 3,000
Mar. 28 Cash paid to Nitin 3,500
Mar. 31 Rent Paid 2,500
8. Enter the following transactions in a Single Column Cash Book :
Date Details Amount
2012 (`)
Apr. 01 Cash in Hand 15,000
Apr. 05 Cash Purchases 1,000
Apr. 08 Cash Sales 800
Apr. 10 Received from Munish 1,000
Apr. 15 Purchased Furniture 500
Apr. 22 Paid Wages 200
Apr. 25 Received Commission 100
Apr. 30 Paid Rent 600
ACCOUNTANCY 103
Journal and Other
Subsidiary Books 9. Enter the following transactions in a Petty Cash Book of Manohar.
Date Details Amount
2012 (`)
Jan 1 Imprest received 1,000
Jan 1 Paid Cartage 200
Notes Jan 2 Paid Postage 102
Jan 8 Paid for refreshments 115
Jan 9 Paid for courier 27
Jan 10 Paid for telegram 17
Jan 20 Paid for refreshment 124
Jan 22 Paid Postage 34
Jan 27 Paid Cartage 120
10. Enter the following transactions in the Bank Column Cash Book of
Mohan for the month of September 2012 :
Date Details Amount
2012 (`)
Sept. 1 Balance of Cash in hand 1,20,000
Sept. 1 Balance of Cash at Bank 1,80,000
Sept. 2 Bought goods by cheque 15,000
Sept. 4 Bought goods by cash 18,000
Sept. 5 Cash Sales 28,000
Sept. 8 Sold goods by cheque 70,000
Sept. 9 Paid wages in cash 11,400
Sept. 10 Purchased furniture and paid by cheque 20,000
Sept. 12 Received a cheque from Suresh for ` 10,000,
which was endorsed to Naresh on the same day.
Sept. 15 A debtor Harish deposited ` 5,000 directly in
our bank account.
Sept. 20 Bank charges ` 200 for issuing a new
cheque book.
Sept. 24 Goods sold for ` 30,000, as 1/3 cash and 2/3
on credit to Gurdeep.
Sept. 25 Received a cheque from Chunnu for ` 8,000
goods sold to him before one month, deposited in bank.
Sept. 28 Cheque received from Chunnu was dishonoured
for which bank charges ` 50.
104 ACCOUNTANCY
Journal and Other
11. Prepare a Bank column Cash Book from the following transactions : Subsidiary Books
Date Details
2012
Mar. 1 Cash in hand ` 2,780, Bank overdraft ` 3,125
Mar. 2 Cheque of ` 400 issued to the petty cashier.
Mar. 5 ` 350 was paid to Hari for the repair of electricity. Notes
Mar. 12 Received ` 1200 for sale of goods.
Mar. 17 Received ` 950 from Sheila after allowing a rebate of ` 20 on
account of retering a bill of exchange.
Mar. 24 Girdhari Lal paid ` 2000 in cash and ` 3000 in cheque, for the
sale of goods to him.
Mar. 25 Bought goods worth ` 1700 from Rahim and paid by cheque.
Mar. 30 Interest on overdraft ` 50 was charged by Bank
Mar. 31 Cash in excess of ` 1000 was deposited into the Bank
12. Prepare a Bank column Cash Book from the following transactions
particulars.
Date Details Amount
2012 (`)
Mar. 1 Cash in hand ` 70,000 and at Bank ` 80,000.
Mar. 5 Bought goods for cheque 10,000
Mar. 10 Sold goods for cash 20,000
Mar. 12 Received a cheque for sale of goods 40,000
Mar. 15 Paid Hari Om by cheque 7,000
Mar. 16 Paid telephone bill 2,000
Mar. 17 Received from Malti 4,000
Mar. 18 Received a cheque from Shweta 8,000
Mar. 20 Withdrawn from Bank for office use 12,000
Mar. 22 Paid wages to workers 18,000
Mar. 25 Cheque of Shweta returned dishonoured
Mar. 25 Banks debits the accounts for bank charges 120
Mar. 30 Interest collected by bank 190
Mar. 31 Cash sales 4,000
13. Prepare a Bank column Cash Book from the following transactions:
Date Details Amount
2012 (`)
Jan. 1 Cash in hand ` 26,800 and at Bank ` 72,400
Jan. 5 Discounted a bill receivable for ` 8,000 at
3% through Bank for two months
ACCOUNTANCY 105
Journal and Other
Subsidiary Books Jan. 8 Bought goods for cheque 4,000
Jan. 10 Purchased goods for cash 7,000
Jan. 13 Paid by cheque for a bill payable 12,000
Jan. 15 Paid trade expenses in cash 9,000
Jan. 17 Paid cash into bank 10,000
Notes Jan. 19 Jacky who owed us ` 600 became insolvent
and paid only 50 P in the rupee.
Jan. 20 Received ` 4,800 from Gianchand
Jan. 22 Paid ` 2,390 to Malika Singh
Jan. 25 Withdrew Cash from bank for office 6,000
Jan. 25 Withdrew cash from bank for private use 7,000
Jan. 28 Sold goods for cash 20,000
Jan. 28 Received a cheque for sale of goods 18,000
Jan. 30 Received a refund of Loan of ` 15,000 and
deposited ` 13,000 in the bank.
14. From the following transactions prepare Bank column Cash Book.
Date Details Amount
2012 (`)
Feb. 1 Cash in hand 10,000
Feb. 1 Bank Balance 40,000
Feb. 3 Cash Sales 13,000
Feb. 4 Deposited into Bank 17,000
Feb. 8 Jimy settled his account by giving a cheque 12,000
Feb. 12 Bought goods by cheque 10,000
Feb. 15 Purchased stationery for cash 5,000
Feb. 20 Jimy's cheque returned dishonoured with bank
charges of ` 50
Feb. 20 Received a cheque from Janakidas 11,000
Feb. 26 Withdrew from Bank for office use 16,000
Feb. 29 Paid salary by cheque ` 11,200 and rent
in cash ` 7,240
15. Prepare a Bank column Cash Book from the following transactions:
Date Details Amount
2012 (`)
Oct. 1 Cash in hand 27,100
Oct. 1 Cash at Bank 72,000
Oct. 6 Bought goods by cheque 14,000
Oct. 7 Bought goods for cash 15,000
106 ACCOUNTANCY
Journal and Other
Oct. 15 Paid trade expenses 4,150 Subsidiary Books
Oct. 16 Paid into Bank 2,000
Oct. 19 Ram who owed us ` 8,000 became
insolvent and paid only 60 paise in the rupee.
Oct. 21 Received cash from Malti 5,800
Oct. 24 Withdrew from Bank 7,500 Notes
Oct. 25 Paid cash to Das & Co. 4,490
Oct. 28 Withdrew from Bank for private use 13,000
Oct. 28 Sold goods for cash 14,000
Oct. 28 Received cheque for goods sold 10,000
Oct. 30 Received refund of loan of ` 18,000 and
deposited ` 6,000 into Bank.
Oct. 31 Bank charges 250
16. Prepare Bank column Cash Book:
Date Details Amount
2012 (`)
Apr. 1 Cash in hand ` 26,500 and balance in Bank Current Account
` 46,400
Apr. 3 Received from Neeraj Singh 7,900
Apr. 10 Paid salaries to the staff 18,000
Apr. 12 Cash Sales 3,750
Apr. 15 Paid to Vivek by cheque 4,200
Apr. 16 Cash purchases 3,300
Apr. 18 Paid bill payable by a cheque 6,400
Apr. 18 Paid to Meena by cheque 1,685
Apr. 19 Paid cash for cartage and coolie 450
Apr. 20 Withdrew cash from bank for office use 7,000
Apr. 20 Paid rent for the month in cash 2,500
Apr. 22 Received cheque form Manish 2,694
Apr. 23 Deposited cash into Bank 3,400
Apr. 24 Purchased a Scooter and paid by a cheque 26,800
Apr. 25 Collections by Bank 18,000
Apr. 25 Received a cheque from Alok Gupta in full
settlement of his account of ` 8,000. 7,900
Apr. 27 Bank notifies that Alok Guptas cheque
has been dishonoured
ACCOUNTANCY 107
Journal and Other
Subsidiary Books Apr. 28 Deposited Cash in the Bank 5,400
Apr. 29 Paid wages 8,200
17. Enter the following transaction in Petty Cash Book. The imprest amount is `
5,000.
Notes Date Details Amount

2012 (`)
Aug. 1 Peons wages 1,400
Aug. 3 Pencils and Pens 70
Aug. 5 Carriage on goods 250
Aug. 10 Postage Stamps bought 135
Aug. 12 Telegrams & Telephones 210
Aug. 14 Sundry Expenses 900
18. A petty cashier received ` 8,000 as impreset amount on September 1,
2012. During the week, his expenses were as follows:
Date Details Amount
2012 (`)
Sept. 1 Taxi Charges 400
Sept. 2 Wages to casual labourers 250
Sept. 4 Bus fare to peon 20
Sept. 4 Stationery purchased 300
Sept. 5 Postage stamps bought 75
Sept. 5 Revenue stamps bought 25
Sept. 5 Repair to furniture 830
Sept. 5 Paid electricity bill 1,400
Sept. 6 Wages paid for coolie-hire 150
Sept. 6 Taxi hire 400
Sept. 6 Telegram 80
Sept. 6 Locks & Keys purchased 70
Sept. 6 Stationery bought 140
Sept. 7 Refreshments to customers 350

7.1 (i) Receipts , Payments (ii) Receipts , Payments
(iii) Debit,Credit (iv) Opening
7.2 I. i) c ii) b iii) b iv) a
v) c vi) a vii) c
108 ACCOUNTANCY
Journal and Other
II. S.No. Transactions Debit Credit Subsidiary Books
Side Side
(i) Mukesh started Business with cash
(ii) Goods Purchased for cash
(iii) Goods sold for cash Notes
(iv) Closing Cash Balance
(v) Cash received from Ankur
7.3 (i) Cash (ii) Cash, Bank (iii) Petty Cash Book
ANSWER TO TERMINAL EXERCISE

5. Closing Cash in hand ` 2,200
6. Closing Cash in hand `. 13,150
9. Cash in hand ` 74
10. Cash in hand ` 1,28,600 and Bank Balance ` 2,19,750
11. Cash in hand ` 1,000 and Bank Balance ` 3,305
17. Cash in hand ` 2,035
18. Cash in hand ` 3,510
ACTIVITY FOR YOU
Every Student gets pocket money on regular basis from his parents and
spends it judiciously on purchasing different type of goods/services. You
may also be receiving money from your grandparents and / or from grand
maternal parents and maintain a record of the money spent by you. Procure
the note book/diary in which you keep the notes regarding receipts and
payments and prepare a Cash Book on the basis of your receipts and
payments for a month.
ACCOUNTANCY 109
MODULE - II
Journal and Other
Subsidiary Books
8
Notes
BANK RECONCILIATION
STATEMENT
If you are a businessman, you must be having a bank account. Whatever banking
transactions you do, you record them in bank column of the cash book, while
the bank is having account in your name in its ledger, copy of your account in
the form of pass book or bank statement is sent to you. If you record all the
transactions correctly in your cash book and bank in its ledger both will show
same balance on any date. But if you find a difference then what will you do?
You will compare the two and find out the reasons of difference. You can
prepare a statement putting up all items of difference in such a way that you
can ascertain the correct balance. This statement is called Bank Reconciliation
Statement.
In this lesson you will learn the meaning of Bank Reconciliation Statement, objectives
of preparing it, main reasons of difference between cash book balance and pass
book balance and preperation of the statement.
OBJECTIVES
After studying this lesson, you will be able to
state the meaning and need of preparing Bank Reconciliation Statement;
explain the reasons for difference between the balances of Cash Book and
Pass Book and
understand the preperation of Bank Reconciliation Statement.
8.1 BANK RECONCILIATION STATEMENT - MEANING
AND NEED
Bank Reconciliation Statement is a statement prepared, periodically with a view to
enlist the reasons for difference between the balances as per the bank column of the
cashbook and pass book/bank statement on any given date.
Need of preparing Bank Reconciliation Statement
A Bank Reconciliation Statement is a statement reconciling the balance as
shown by the bank passbook and the balance as shown by the Bank column of the
110 ACCOUNTANCY
Bank Reconciliation Statement MODULE - II
Journal and Other
Cashbook. The objective of preparing such a statement is to know the causes of Subsidiary Books
difference between the two balances and to reconcile these differences.
8.2 CAUSES OF DIFFERENCES BETWEEN CASH BOOK
AND PASS BOOK
The reasons for difference in balance of the cash book and pass book are as under: Notes
i) Cheques issued by the Trader but not yet presented for payment :
When cheques are issued by Trader in favour of his creditors, these
are shown on the payment side of the bank column of the cash book. It
reduces the bank balance as per cash book. The bank will debit the
firms account when these cheques are presented for payment. There is
a time period between the issue of cheque and its being presented in
the bank for payment. This may cause difference to the balance of cash
book and pass book.
ii) Cheques deposited into bank but not yet collected or credited by the
Bank : When cheques are deposited into bank, the firm immediately enters
it on the debit side of the bank column of cash book. It increases the bank
balance as per the cash book. However, it takes time in, collecting the amount
of cheques, so Bank Balance does not increase on the same date on which
cheque has been deposited in the bank. This may cause the difference between
cash book and pass book balance.
iii) Amount directly deposited by customers/debtors in the bank account:
When the debtors of the businessman have been given the authority to deposit
the amount due from them in the firms account with the bank, the bank
credits the firms account with the amount deposited but the same amount is
not recorded in the cash book on the day it is deposited. As a result the
balance in the cash book will be less than the balance shown in the Pass
book.
iv) Bank charges charged by the Bank : The bank charges, fees or
commission from time to time for various services provided to the
customer and debits the customers account without intimation to the
firm/customer. As a result, the balance of the cash book will be more
than the balance of the pass book.
v) Interest and dividend received by the bank on behalf of the customer:
The interest on debentures or dividend on shares held by the account holder
is directly deposited by the company in the bank account of customer through
Electronic Clearing System (ECS). But there may not be any entry in the
cash book for such items because the firm does not get the information till it
receives the bank statement. As a consequence, the firm enters it in its cash
ACCOUNTANCY 111
MODULE - II Bank Reconciliation Statement
Journal and Other
Subsidiary Books book on a date later than the date on which it is recorded by the bank. As a
result, the balance as per cash book and pass book will differ.
vi) Direct payments made by the bank on behalf of the customer : The
firm may give standing instructions to its banker to make payment of
telephone bills, rent, insurance premium, taxes, etc. On making such
Notes payments, the bank will debit the firms account immediately, but the
firm will record the same on receiving information from the bank in
the form of Pass Book or bank statement. As a result, the balance of the
pass book is less than that of the balance shown in the bank column of
the cash book.
vii) Dishonour of cheques deposited with bank : A firm may receive a number
of cheques from its customers. Some of the cheques deposited by the firm
with the bank may be dishonoured. In this case, the Bank debits firms
account. But the firm records the same when it receives the information
from the bank. As a result, the balance as per cash book and that of pass
book will differ.
viii) Errors committed in recording transactions by the firm : The firm may
commit certain errors e.g., omission or wrong recording of transactions
relating to cheques deposited, cheques issued and wrong balancing etc. In
this case, there would be a difference between the balances as per Cash
Book and as per Pass Book.
ix) Errors committed in recording transactions by the Bank : The bank
may also committ errors while recording transactions in the customers
account, e.g., omission or wrong recording of transactions relating to
cheques deposited etc. As a result, the balance of the bank pass book
and cash book will not agree.

I. In each of the following cases indicate the alternative which you
consider to be correct.
i. A bank reconciliation statement is prepared to know the causes
for the difference between :
a) the balance as per cash column of the cash book and pass
book
b) the balance as per bank column of the cash book and pass
book
c) neither of the two .
112 ACCOUNTANCY
Journal and Other
ii. Bank reconciliation statement is : Subsidiary Books
a) a Ledger account
b) a part of the cash book
c) a statement separately prepared to find out the causes of
difference between bank column of cash book and pass book.
iii. A bank reconciliation statement is prepared with the help of : Notes
a) Bank pass book and bank column of cash book,
b) Bank pass book and cash column of cash book
c) Neither of the two.
II. Fill in the blanks with suitable word/words
i. The copy of customers account with the bank is
called__________
ii. The cheques deposited are entered on the __________ of the
bank column of cash book.
iii. Bank reconciliation statement is prepared to _______the bank
balance as shown by the cash book and the bank statement.
III. Given below are statements. Some of these statements are true and
some are false. Write T for True and F for false statements.
i. Bank credits traders account as soon as it receives cheques
from the firm.
ii. Bank makes certain payments on behalf of the customer under
his standing instructions.
iii. Bank charges are never entered in the cash book.
iv. Direct receipts by the bank on behalf of customer would increase
the balance shown by pass-book.
8.3 PREPARATION OF BANK RECONCILIATION
STATEMENT
Before preparing Bank Reconciliation Statement first we should check whether
balance is positive or negative.
I. Favourable balances : There are two possibilities :
a. Debit balance as per cash book is given and the balance as per
pass book is to be ascertained.
b. Credit balance as per pass book is given and the balance as per
cash book is to be ascertained.
As you have already studied that the Bank Reconciliation statement is prepared
to reconcile the differences in the balances of Cash Book and Pass Book. If
Cash Book Debit balance or balance as per cash book is given then we have to
reconcile with the balance of Pass Book.
ACCOUNTANCY 113
Journal and Other
Subsidiary Books To reconcile the Cash Books balance with the balance of the Pass Book take up all
the points of differences and add all the amounts to the balance of cash book which
are credited in the Pass Book but not in the Cash Book balance and subtract all
such items which are showing less balance in Pass Book for example
i. A cheque amounting to ` 5,000 was issued but it was not presented into
Notes the bank for payment. It shows that the Cash Book will be showing lesser
balance than Pass Book balance. Therefore, ` 5,000 will be added to the
balance of cash book & balances of both the books will be the same.
ii. On the other hand a customer of the account holder has deposited ` 3,000
directly into the Bank under standing orders of the businessman. The result
will be more balance in Pass Book then cash books balance. If this amount
` 3000 is added with the balance of Cash Book, then both the books will
show the same balance.
iii. In case of Bank charges etc. Pass Books balance is decreased by the
Bank. In such a case to reconcile the balance of the Cash Book with
Pass Book, the Cash Books balance will be decreased.
To summaries, it is suggested that if the balance of Cash Book is given, and we have
to reconcile with Pass Book. Then the causes of differences of all the transaction will
have to be checked and the item which are added in the balance of Pass Book will
be added, the items which are subtracted from Pass Book will be deducted from the
balance of the Cash Book, as it is clear from the above examples.
Note : If overdraft as per cash book is given, only the overdraft amount will be
written in Minus (-) colums, rest of the activities will be the same.
In case of Pass books credit balance or balance as per Pass Book is given, the
reverse steps will be taken to reconcile the balance of the Pass Book with Cash
Book. Same steps will be applied in case of an overdraft as per Pass Book to
reconcile with Cash Book.
Format of Bank Reconciliation Statement
Bank reconciliation statement is a statement, not an account. It can be prepared by
using various methods. Thus, different formats are used for preparing it. A simple
format of Bank Reconciliation Statement is given as follows:
114 ACCOUNTANCY
Journal and Other
Bank Reconciliation Statement Subsidiary Books
as on
Particulars Plus Minus
Items (+) Items ()
(`) (`)
Notes
Balance as per Cash Book/Pass Book (i.e. given Balance)
Add : (Effect or
causes of
. Difference
Less : i.e. Plus or Minus)

Total ..
Balance as per Pass Book/ Cash Book
In case Cash Book shows a credit bank balance or Pass Book shows a debit balance,
while preparing Bank reconciliation statement, it will be shown in the minus column.
The following illustrations will help you to understand the preparation of
Bank Reconciliation Statement with the favourable balance as per cash book
or pass book.
Illustration 1 (Balance as per Cash Book) :
From the following particulars of M/s ABC Ltd., prepare bank reconciliation statement
as on 31.7.2012
i. Bank balance as per cash book ` 62,500
ii. Cheques deposited into bank but not credited upto 31.7.2012 ` 8,900
iii. Cheques issued but not presented for payment till 31.7.2012 ` 12,500
iv. Bank credited ` 5,000 for receiving dividend.
v. Bank charges debited by Bank ` 400.
Solution
Bank Reconciliation Statement of M/s ABC Ltd.
As on July 31, 2012
Particulars (Plus) (Minus)
(`) (`)
i. Balance as per cash book 62,500
ii. Cheques deposited but not credited by the Bank 8,900
iii. Cheques issued but not presented for payment 12,500
ACCOUNTANCY 115
Journal and Other
Subsidiary Books iv. Dividend received 5,000
v. Bank charges debited by bank 400
Balance as per pass book 70,700
Total 80,000 80,000
(as the total of plus column is greater than
Notes the total of minus column.)
Illustration 2 (Balance as per Cash Book)
From the following particulars of Deep Traders, prepare a bank reconciliation
statement on June 30, 2012.
i. Balance as per the cash book ` 1,00,000
ii. Cheques for ` 17,550 are deposited in the bank but not yet collected by the
Bank.
iii. ` 5250 charges for Credit Card fee is debited by bank, which is not recorded
in cash book.
iv. There was also a debit in the pass book of ` 40,000 in respect of a discounted
bill dishonoured.
Solution
Bank Reconciliation Statement of M/s Deep Traders
as on June 30, 2012
(`) (`)
i. Balance as per cash book 1,00,000
iii. Credit card fee charges debited by the Bank 5,250
iv. Discounted bill dishonoured recorded only
in Pass book. 40,000
Balance as per Pass Book 37,200
Total 1,00,000 1,00,000
Ilustration 3 (Balance as per Pass Book)

From the following particulars of M/s XYZ Ltd., prepare bank reconciliation statement
as on 31.7.2012.
i. Balance as per pass book i.e. ` 70,700 as the starting point.
ii. Cheques deposited into bank but not credited upto 31.7.2011 ` 8,900
iii. Cheques issued but not presented for payment till 31.7.2011 ` 12,500.
iv. Bank credited ` 5,000 for receiving dividend.
v. Bank charges debited by Bank ` 400
116 ACCOUNTANCY
Journal and Other
Bank Reconciliation Statement of M/s XYZ Ltd.
As on 31st July 2012
(`) (`) Notes
i. Balance as per pass book 70,700
iii. Cheques issued but not presented for payment 12,500
iv. Dividend received 5,000
v. Bank charges debited by bank 400
Balance as per cash book 62,500
Total 80,000 80,000
Illustration 4 (Balance as per Pass Book)
Bank Pass book of M/s Telemax Industries showed a credit balance of ` 1,27,350
on July 31,2012. The following differences were found on that date between
the cash book and the pass book balances :
i. Cheques issued before July 31, 2012, amounting to ` 79,000 had not
been presented for payment.
ii. Two cheques of ` 5,000 and ` 3,500 were deposited into bank on July
31, but the bank credited for the same in August.
iii. Insurance premium directly paid by bank ` 5,000
iv. ` 2,000 wrongly debited to the firm account by the Bank.
Prepare Bank Reconciliation Statement as on July 31, 2012.
Solution
Bank Reconciliation Statement of M/s Telemax Industries
As on July 31, 2012
(`) (`)
i. Balance as per Pass Book 1,27,350
ii. Cheques issued but not presented for payment 79,000
iii. Cheques deposited but credited by the
bank in August. 8,500
iv. Insurance premium directly paid by Bank 5,000
v. Wrongly debited by the bank. 2,000
Balance as per cash book 63,850
Total 1,42,850 1,42,850
ACCOUNTANCY 117
Journal and Other
Subsidiary Books II. When there is a Situation of Bank Overdraft
When there is overdraft as per Cash Book or Pass Book it will be written in the
Minus Column as it is a negative balance. Different items will be accordingly
added or subtracted from the given overdraft as the case may be. However, it
may be noted that when overdraft is treated as a negative balance and written
Notes in the minus column, all those items which appear in the minus column get
added to it automatically. Similarly, all items written in the plus column get
deducted out of it.
Illustration 5 (Overdraft as per Cash Book)
From the following particulars, ascertain the balance as would appear in the
Pass Book of Manav Industrial Works on 31st July, 2012.
i. Credit Balance as per Cash Book on 31st July,2012 was ` 4,299
ii. Cheques issued but not cashed prior to 31st July, 2012 amounted to ` 1,151
iii. Cheques paid into Bank but not collected before 31st July amounted to ` 858
iv. There was a debit of ` 40 for Bank charges in the Pass Book.
Solution
Bank Reconciliation Statement of Manav Industrial Works
As on 31 July 2012
Particulars Amount Amount
(`) (`)
Overdraft as per Cash Book 4,299
i. Cheques issued but not yet presented for payment 1,151
ii. Less cheques paid into Bank but not collected 858
iii. Bank Charges recorded in Pass Book only but
not in cash Book. 40
Overdraft as per Pass-Book 4046
Total 5197 5197
Illustration 6 : (Overdraft/Unfavourable balance as per pass book)
From the following particulars of Aman and Sons prepare bank reconciliation
statement as on 31st December, 2012
`
i. Overdraft as per pass book (31 Dec., 2012)
st
10,000
ii. Cheques issued but not presented 6,000
iii. Cheques deposited but not collected 1,800
iv. Dividends collected and credited by the bank which did not 500
appear in the cash book
118 ACCOUNTANCY
Journal and Other
v. Bank charges debited in the pass book but not yet recorded in 200 Subsidiary Books
the cash book
vi. A bank draft on the request of Aman was issued by the bank
which has not been recorded in the cash book. 1,000
Solution
Bank Reconciliation Statement Notes
As on 31st December, 2012
(`) (`)
Overdraft (Dr. balance) as per Pass Book 10,000
Add: i. Cheques paid into bank but not collected 1,800
ii. Bank charges debited in pass book 200
iii. Draft issued by bank not recorded
in the cash book 1,000
Less: i. Cheques issued but not presented for payment 6,000
ii. Dividend collected and credited by bank 500
Cr. Balance as per Cash Book 13,500
Total 16,500 16,500
Illustration 7 : (Unfavourable balance of pass book)
Prepare Bank Reconciliation statement from the following :
`
i. Overdraft as per Pass Book on 31 Dec., 2012
st
5,200
ii. Cheque issued but not presented 1,200
iii. Interest collected by bank 500
iv. Interest charged on overdraft 430
v. Bank column of receipt side of Cash Book is overcast 100
vi. Bank column of payment side of Cash Book is undercast 40
vii. Bank issued draft to supplier as per instruction 2,000
viii. A cheque of ` 600 banked and credited, but omitted to be
recorded in Cash book
Solution
Bank Reconciliation Statement
As on 31st December, 2012
(`) (`)
Overdraft as per Pass Book 5,200
Add : (i) Interest Charged by bank on overdraft 430
ACCOUNTANCY 119
Journal and Other
Subsidiary Books (ii) Bank column of receipt side of cash book
is overcast 100
(iii) Bank column of payment side of cash
Bank is undercast 40
(iv) Bank issued a draft 2,000
Notes Less: (i) Cheque issued but not presented 1,200
(ii) Interest collected by bank 500
(iii) Cheque credited in bank omitted to
recorded in Cash Books 600
Total 7,500 7,500
Illustration 8 : (Unfavourable balance as per Cash Book)
Prepare a Bank Reconciliation Statement from the following particulars:
i. On 31st March, 2012, the Cash Book showed a credit bank balance (i.e.,
bank overdraft) of ` 2,000
ii. Out of the total cheques amounting to ` 20,000 drawn, cheques aggregating
` 13,000 were encashed in March, cheques aggregating ` 4,000 were
encashed in April and the rest have not been presented at all.
iii. Out of the total cheques amounting to ` 15,000 deposited, cheques
aggregating ` 11,500 were credited in March, cheques aggregating ` 2,000
were credited in April, and the rest have not been collected at all.
iv. The bank has debited ` 1,500 on account of interest on overdraft and Rs.
100 as bank charges.
v. The bank has credited ` 1,700 on account of interest collected on securities.
vi. A Bill Receivable of ` 1,000 (discounted with the bank in January) dishonoured
on 31st March (but not yet recorded in the Cash Book).
Solution
As at 31st March, 2012
(`) (`)
Overdraft as per Cash Book (Cr.) 2,000
(i) Cheques drawn but not presented for
payment till 31st March 7.000
(ii) Interest on securities collected by the Bank 1,700
(iii) Cheques deposited but not collected
till 31st March 3,500
(iv) Interest on overdraft and bank charges 1,600
(v) Discounted bill receivable dishonoured 1,000
Overdraft as per Pass Book (Cr.) 600
Total 8,700 8,700
120 ACCOUNTANCY
Journal and Other
Illustration 9 : (Unfavourable balance as per Cash Book) Subsidiary Books
Comparing Rams Cash Book with the Bank Statement of his account for the month
of November, 2012 the followings were noticed :
i. Cash Book showed an overdraft of ` 45,000.
ii. A cheque for ` 17,500 drawn on his saving account has been shown as
drawn on his Current Account. Notes
iii. Cheques amounting to ` 70,000 drawn and entered in the Cash Book
have not been presented.
iv. Cheques amounting to ` 60,000 sent to the bank for collection, which though
entered in the Cash Book have not been credited by the bank.
v. Bank charges of ` 1,750 as per Bank Statement have not been recorded
in the Cash Book.
vi. Payment side of the Cash Book was by under cash ` 1,500.
vii. ` 35,000 dividend were collected by the bank on behalf of the customer.
Solution
As at 30th November, 2012
(`) (`)
Overdraft as per Cash Book (Cr.) 45,000
i. Payment side of the Cash Book is undercast 1,500
ii. Cheques drawn on saving account but wrongly
shown as drawn on Current Account 17,500
iii. Cheques issued but not yet presented for payment 70,000
iv. Cheques paid into the bank but not yet credited 60,000
v. Bank charges 1,750
vi. Direct payment of dividend into the bank 35,000
Overdraft as per Pass Book (Cr.) 14,250
Total 1,22,500 1,22,500
Illustration 10 : (Overdraft as per Pass Book)
On March 31, 2012 there is an Overdraft of ` 15,000 in the Pass Book of Sh.
Jagdish Kumar. On comparison with the Cash Book, it was found that
i. The bank has charged interest on overdraft for ` 600.
ii. Cheques for ` 80,000 were issued and out of these cheques only for
` 8,000 have been encashed.
iii. Cheques for ` 4,500 were deposited into bank but cheques for ` 500
only were cleared.
iv. The bank collected interest on his investments ` 600 and a direct payment
was made into his account by a debtor of ` 900.
ACCOUNTANCY 121
Journal and Other
Subsidiary Books v. He had received a cheque for ` 1,200 which he entered in the Cash Book
but he forgot to send the cheque to the bank.
Prepare Bank Reconciliation Statement.
Solution
Notes As on March 31, 2012
(`) (`)
i. Interest on overdraft 600
ii. Cheques issued but not presented for payment
(` 80,000 ` 8,000) 72,000
iii. Cheques deposited but not cleared and collected
(` 4,500 ` 500) 4,000
iv. Interest collected by the bank 600
v. Direct payment into the bank 900
vi. Cheques entered in Cash Book but not
sent to Bank 1,200
(because minus column total is more than pluscolumn)
Total 88,500 88,500
Illustration 11 : (Overdraft as per Pass Book)
On March 31, 2012 the pass book of Rajat showed an overdraft of ` 5,000. The
following discrepancies were noted on comparing with the Cash Book :
i. Cheques issued before March 31, 2012 for ` 1,900 were presented for
payment on April 4, 2012.
ii. Cheques for ` 8,200 deposited in the bank but cleared on April 2, 2012.
iii. Interest on overdraft ` 1,500 but it doesnt appear in Cash Book.
iv. Dividend of ` 6,000 collected by bank and entered in Pass Book. This
is not there in Cash Book.
v. Locker rent ` 80 not entered in Cash Book.
vi. A cheque of ` 7,800 was dishonoured but it does not appear in Cash Book.
Prepare Bank Reconciliation Statement as on March 31, 2012.
122 ACCOUNTANCY
Journal and Other
As on March 31, 2012
(`) (`)
Notes
i. Cheques issued but not presented for payment 1,900
ii. Cheques deposited but not yet cleared 8,200
iii. Interest on Overdraft 1,500
iv. Dividend collected by the bank 6,000
v. Locker rent charged by bank. 80
vi. Cheques dishonoured 7,800
Balance as per Cash Book 4,680
(as total of plus column is more than that of minus column)
Total 17,580 17,580
Illustration 12 : (Overdraft as per Cash Book)
On September 30, 2012 there was an Overdraft at ` 7,700 as per the Cash book of
a businessman. When it was compared with Pass Book it was discovered that:
i. Cheques amounting to ` 3,500 were paid into Bank but those for only
` 1,000 were credited in Pass Book so far.
ii. Cheques amounting to 6,500 were issued in September but only cheques
of ` 2,650 were presented for payment.
iii. A cheque received for ` 2,000 was entered in the Cash Book but was not
sent to the bank at all.
iv. There is a debit in the Pass Book for ` 65 for bank charges and ` 35 for interest.
v. ` 2,400 have been directly deposited into bank by somebody. It does
not appear in the Cash Book.
vi. Insurance premium has been paid by the bank ` 1,500 under his standing
instructions.
Prepare Bank Reconciliation Statement as on September 30, 2012.
Solution
As on September 30, 2012
(`) (`)
i. Cheques deposited but not cleared
(` 3,500 ` 1,000) 2,500
ACCOUNTANCY 123
Journal and Other
Subsidiary Books ii. Cheques issued but not enchased till date
(` 6,500 ` 2,650) 3,850
iii. Cheque entered in Cash Book but not sent to bank. 2,000
iv. Bank charges 65
v. Interest charged by bank 35
Notes vi. Amount directly deposited by some customer 2,400
vii. Insurance premium paid by Bank under his standing
Instruction. 1,500
(because the total of minus column is more than the total
of plus column).
Total 13,800 13,800

I. You are given the balance as per Pass Book and balance as per
Cash Book is to be ascertained by you. Out of the following
transactions, write A against those amounts which will be added to
the balance of Pass Book and R against those by which balance of
Pass Book will be reduced.
i. Bank charges.
ii. Cheques issued but not encashed.
iii. Cheques deposited with bank and dishonoured
i. Which of the following is a correct statement related to bank
reconciliation statement.
a) It is prepared after every month.
b) It is prepared after every six month.
c) It is prepared at the end of the year.
d) It is prepared periodically.
ii. If balance as per Cash Book is ` 8000. Cheque of ` 5000 and
cheque of ` 18000 were issued, but were not presented for payment
what will be the balance as per pass book after reconciliation?
a) ` 8000 b) ` 13000
c) ` 23000 d) ` 31000
iii. While preparing bank reconciliation statement from the pass book
balance which of the following items will be subtracted?
a) Cheques deposited but not credited.
b) Cheque issued but not presented for payment.
c) Bank Charges d) Insurance Premium paid by the bank.
124 ACCOUNTANCY
Journal and Other
iv. Which of the following statements related to bank reconciliation Subsidiary Books
statement is correct?
a) It is prepared to ascertain profit of the business concern.
b) It is prepared to calculate the balance as per cash book at the
end of the month.
c) It is prepared to reconcile the balance as per cash book and Notes
as per pass book.
d) It is prepared to ascertain the financial position of the business.
v. The pass book shows a debit balance of ` 4,500 and a customer has
directly deposited ` 2,000 in the bank account which is not recorded
in cash book. What will be the balance as per cash book?
a) ` 6,500 b) ` 2,500 (for favourable)
c) ` 6,500 (over draft) d) ` 2,500 (overdraft)

Bank Reconciliation Statement is a statement prepared, periodically with the
purpose to enlist the reasons of difference between the balances as per the
bank column of the cash book and pass book on any given date.
A Bank Reconciliation Statement is a statement reconciling the balance as
shown by the bank passbook and the balance as shown by the Bank column
of the Cash book. The objective of preparing such a statement is to know the
causes of difference between the two balances and to reconcile them.
The reasons for difference in balance of the cash book and pass book are
as under:
Cheques issued by the Trader but not yet presented for payment
Cheques deposited into Bank but not yet collected or credited by
the Bank
Amount directly deposited by customers in the Bank account
Bank Charges charged by the Bank
Interest and dividend received by the Bank
Direct payments made by the Bank on behalf of the customers
Dishonour of Cheques/Bill discounted
Errors committed in recording transactions by the firm
Errors committed in recording transactions by the Bank
TERMINAL EXERCISE
1. What is meant by a Bank Reconciliation Statement?
2. What is the need of preparing Bank Reconciliation Statement?
ACCOUNTANCY 125
Journal and Other
Subsidiary Books 3. Enumerate the causes of difference in the balances of cash book and pass
book.
4. From the following particulars, prepare Bank Reconciliation Statement
as on December 31, 2012.
(i) Balance as per Cash Book ` 4,200
Notes (ii) Cheques issued but not presented for payment ` 2,000
(iii) Cheques deposited but not collected ` 3,000
(iv) Bank Charges debited by the Bank ` 250
5. Prepare Bank Reconciliation statement as on March 31, 2012. On this
date the passbook of M/s Birla Industries showed a balance of ` 27,500
(a) Cheques of ` 14,000 directly deposited by a customer.
(b) Cheques for ` 13,500 were issued during the month of March
but of these cheques for ` 1,500 were not presented by the end
of March.
(c) The Bank collected ` 2,500 as dividend on shares.
(d) Cheques of ` 17,500 were paid into bank but of ` 8,500 were
realised in the month of April, 2012.
6. From the following particulars, ascertain the balance as would appear
in the Pass Book of Adani Industrial works on 31st January, 2012.
(a) Balance as per Cash Book on 31st January 2012 was ` 4,000
(b) Cheques issued but not cashed prior to 31st January, 2010
amounted to ` 1,000
(c) Cheques paid into Bank but not collected before 31st January
amounted to ` 800.
(d) There was a debit of ` 400 for Bank charges in the Pass Book.
7. From the following particulars prepare Bank Reconciliation statement
as on 31st March, 2012 :
i. Overdraft as per Cash Book ` 12,500
ii. Cheques of ` 18,000 were issued but were not presented for payment.
iii. Cheques of ` 24,000 were paid into bank but wore not credited till
31 March 2012.
iv. Bank charges ` 1,500.
8. The bank column of a Cash Book showed a debit balance of ` 1,49,000
on June 30, 2012. Entries in the Cash Book and the Pass Book were
compared and the following differences were noticed:
i. Cheques of Shyam ` 9,000 and of Mohani ` 15,000 were deposited
but were not collected upto June 30, 2012.
ii. Ram, a creditor, deposited a cheque of ` 8,000 directly into the
bank.
iii. Bank allowed an interest of ` 1,500.
126 ACCOUNTANCY
Journal and Other
iv. Cheque for ` 10,000 issued to Radhey was not presented for Subsidiary Books
payment.
v. Bank debited the account by ` 8,000, being insurance premium.
vi. Bank debited the account by ` 700, being bank charges.
You are required to prepare a Bank Reconciliation Statement as on
June 30, 2012. Notes
9. From the following particulars ascertain the balance that would appear
in the Bank Pass Book of Arun on 31st March, 2012.
i. The bank overdraft as per Cash Book on 31st March, 2012 ` 60,200
ii. Interest on overdraft for 6 months ending 31st March, 2012, ` 10,000
entered in the Pass Book.
iii. Bank charges of ` 1,300 for the above period are debited in the
Pass Book.
iv. Cheques issued but not cashed prior to 31 st March, 2012,
amounted to ` 10,620.
v. Cheques paid into the bank but not cleared before 31st March,
2012, were for ` 16,500.
vi. Interest on investment collected by the bank and credited in the
Pass Book, ` 11,000
10. From the following particulars, prepare a bank reconciliation statement
as on 31-3-2012:
i. Balance as per pass book on 31st March, 2012 overdrawn ` 10,266.
ii. Cheques drawn on 31st March, 2012 but not cleared till 2nd April,
2012, ` 120; ` 10,211; ` 981 and ` 1,128.
iii. Interest on bank overdraft not entered in the cash book ` 1,510.
iv. Out-station cheques for ` 21,000 lodged in the bank on 30th
March, 2012 but credited in April, 2012.
v. ` 100 being chamber of commerce subscription paid by the
bank under a standing order on 31st March, 2012 was not entered
in the cash book.
vi. A hundi of ` 2,500 due on 31st March, 2012 was sent to the
bank for collection on 29th March, 2012 and entered in the cash
book forthwith, but the proceeds thereof were not credited in
the pas book till 2nd April, 2012.
11. Prepare a bank reconciliation statement from the following particulars:
On 31st December, 2016 I had overdraft of ` 750 as shown by my
pass book. I had issued cheques amounting to ` 250 of which `
200 worth only seem to have been presented for payment. Cheques
amounting to ` 100 had been paid in by me on 30th December, but
of these only ` 75 were credited in the pass book. I also find that a
ACCOUNTANCY 127
Journal and Other
Subsidiary Books cheque for ` 10 which I had debited to bank account in my books has
been omitted to be banked. There is a debit in my pass book of ` 25
for interest. An entry of ` 30 of a payment by a customer direct into
the bank appears in the pass book. My pass book also shows a credit
of ` 60 to my account for interest on investments directly collected by
Notes my bankers.
12. The pass book of Rita & Sons showed a balance of ` 8,500 on 31st
May, 2012. Cheques amounting to ` 2,750 were deposited into the
bank on 27th May but Cheque worth ` 510 were credited on 2nd June
and one cheque of ` 150 was returned by them as dishonoured on 5th
June. Cheques drawn but not presented for payment amounted to `
6,000. A B/P paid by the bank but not entered in the cash book ` 1,500.
Credit side of bank column of cash book was cast ` 100 short. Preeti
Bros. the firms agent were requested to remit ` 4,000 through telegraphic
transfer but they have remitted only ` 2,500 for which there was no entry
in the cash book. Find out the balance as per cash book and ascertain the
correct balance of cash book as on 31-5-2012.
13. On 30th June, 2012 the cash book of a merchant disclosed a balance of
` 5,820. On checking entries in the cash book with the bank statement,
it was ascertained that :
i. Cheque for ` 2,200 deposited into bank, had not yet been cleared.
ii. Cheques issued but not presented for payment ` 1,600.
iii. A dividend of ` 380 by collected to the bank had not been
recorded in the cash book.
iv. Bank charges ` 40 have not been recorded in the cash book.
v. A B/R of ` 2,500 discounted with the bank is entered in the
cash book without recording the discount charge of ` 100
You are required to prepare a bank reconciliation statement.
14. From the following particulars, prepare a bank reconciliation statement
as on 31st March, 2012 and show necessary adjustments in cash book
to find out correct balance:
i. Bank balance as per pass book (overdraft) ` 3,000.
ii. A cheque of ` 2,000 was credited in the pass book on 28-3-2012, later
dishonoured and was debited in the pass book on 1-4-2012. There was
no entry of this dishonoured cheque in the cash book within the date.
iii. The bank collected ` 1,000 by way of interest and credited the
amount but the same was not recorded in the cash book within
31st March, 2012.
iv. A cheque of ` 25,000 was lodged in the bank on 31st March, 2012
but the same was credited in the pass book only on 7th April, 2012.
128 ACCOUNTANCY
Journal and Other
v. Of the cheques drawn on 28th March, 2012 for ` 8,000, a cheque of Subsidiary Books
` 2,000 was presented for payment on 7th April, 2012.
vi. On scrutiny it was further found that the banker has given a wrong
credit for ` 500 and a wrong debit for ` 200 in the pass book which
have not been recorded in the cash book within 31st March, 2012.
Notes

8.1 I. i) b ii) c iii) a
II. i) pass book ii) Debit side iii) reconcile
III. i) F ii) T iii) F iv) T.
8.2 I. i) A ii) R iii) A
II. i) d ii) d iii) b iv) c v) c

4. Balance as per Pass Book ` 2,950.
5. Balanc as per Cash Book ` 18,000.
7. Overdrafts per Pass Book ` 20,000.
8. Balance as per Pass Book ` 1,35,800.
9. Overdraft as per Pass Book ` 66,380.
10. Overdrafts as per Cash Book ` 2,404.
11. Overdrafts as per Cash Book ` 830.
12. Balance as per Cash Book ` 2,260.
14. Balance as per Cash Book ` 19,300.
ACTIVITY FOR YOU
Visit any nearby business establishment. Compare its Cash Book (bank
column) with the Pass Book. Find out the entries which have been
made in the Cash Book but not in the Pass Book and also the entries
which have been made in the pass book but not in the Cash Book. Make a
list of these entries along with the amount involved.
ACCOUNTANCY 129
MODULE - II
Journal and Other
9
Subsidiary Books
Notes
PURCHASES AND SALES BOOK
In the previous chapters you have learnt that journal can be classified into various
special journals/books and journal proper. These special journals/books are also
known as special purpose books. In this lesson you will learn about various types of
special journals/books such as Purchases Book, Purchase Returns Book, Sales
Book, and Sale Returns Book. A business can divide its journals into many more
books according to requirement, if the number of business transactions of similar
nature are quite large and repetitive in nature.
OBJECTIVES
After studying this lesson you will be able to :
understand the meaning of Purchases Book and Purchases Returns Book;
prepare Purchases Book and Purchases Returns Book;
understand the meaning of Sales Book and Sales Returns Book and
prepare Sales Book and Sales Returns Book
9.1 MEANING OF PURCHASES BOOK AND
PURCHASES RETURNS BOOK
If your firm deals in purchasing of goods on credit involving large number of
transactions, it will be convenient to maintain Purchases Book as a journal of original
entry for recording all transactions of goods purchased on credit by your firm.
Transactions related to purchasing good by cash are not recorded in Purchases
Book, these are recorded in Cash Book. Similarly, any credit purchases of items
which are not related to resale as goods will also not be recorded in the Purchases
Book, these are recorded in Journal Proper.
When the goods are purchased on credit, an invoice/bill issued by the supplier, is
received. Such invoice/bill contains detailed information related to transaction such
as details of items purchased, list price, various discounts if any, various applicable
charges, net amount payable, terms and conditions, date and serial number of
invoice/ bill etc. Thus, necessary information required for recording into Purchases
130 ACCOUNTANCY
Purchases and Sales Book MODULE - II
Journal and Other
Book are available with the invoice/bill. A specimen format of Purchase Book is Subsidiary Books
given as under:
Purchase (Journal) Book
Date Invoice Voucher Particulars L.F. Detail Total
No. No. (Name of Supplier) (`) (`)
Notes
The explanations of above mentioned columns of the Purchase Book are as follows:
Date : In this column, the day, month and year of the transactions are recorded in
Invoice Number : In this column, Invoice/bill number is entered.
Voucher Number : In this column, voucher number is entered
Particulars (Name of Supplier) : In this column, the name of supplier-firm, from
whom the goods were purchased, is written in bold letters or underlined. Below this,
the details of goods purchased are written in serial order.
Ledger Folio : In this column, the page number of the ledger book or ledger account
number of the supplier party is put up for the purpose of cross-reference.
Details : Any trade discount allowed by the supplier is to be deducted from the
total of particulars column. the net amount after deducting trade discount (if any) is
taken to this column.
Amount : The net amount which is payable to the supplier, is mentioned in the
appropriate currency as shown in the invoice/bill.
Note : After calculating the net amount of purchases, the amount charged by the
seller for sales tax/VAT is also added to the net amount payable to the supplier. If
there are some packing charges claimed by the seller, they will also be included with
the net amount payable.
Illustration 1
Prepare a purchases book from the following transactions of Sonu Electric Stores,
New Delhi.
ACCOUNTANCY 131
MODULE - II Purchases and Sales Book
Journal and Other
Subsidiary Books 2012
Jan. 4 Bought from Malik dealers, Delhi, on credit :
100 Table fans @ ` 300 each
50 Tubelights @ ` 25 each
40 Electric irons @ ` 60 each
Notes Trade discount 20%
Jan. 11 Purchased from Jawa Electric Store, Gaziabad, on credit:
20 Ceiling fans @ ` 500 each
50 Heaters @ ` 80 each
20 Mixy @ ` 1,000 each
Trade discount 10%
Sales tax 12%
Jan. 14 Purchased from Jain Hind Traders, New Delhi on credit:
20 dozen Bulbs @ ` 50 per dozen
10 dozen Lamps @ ` 40 per dozen
Add : Packing charges ` 15
Jan. 25 Bought from Asha Electric Appliances, Faridabad
5 Washing machines @ ` 1,200 each, and paid in cash
Jan. 31 Bought from Babu Furniture House, on credit:
8 Chairs at ` 80 per chair
2 Tables at ` 500 per table.
Solution Purchases Book
Date Invoice Voucher Particulars (Name of Supplier) L.F. Details Total
2012 No. No. (`) (`)
Jan. 04 Malik Dealers, Delhi :
100 Table fans @ ` 300 each 30,000
50 Tubelights @ ` 25 each 1,250
40 Electric irons @ ` 60 each 2,400
33,650
Less : Trade discount @ 20% 6,730 26,920
Jan. 11 Jawa Electric Store, Gaziabad :
20 Ceiling fans @ ` 500 each 10,000
50 Heaters @ ` 80 each 4,000
20 Mixy @ ` 1,000 each 20,000
34,000
Less : Trade discount @ 10% 3,400
30,600
Add : Sales tax @ 12% 3,672 34,272
Jan. 14 Jai Hind Traders, New Delhi :
20 dozen Bulbs @ ` 50 per dozen 1,000
10 dozen Lamps @ ` 40 per dozen 400
1,400
Add : Packing charges 15 1,415
132 ACCOUNTANCY
Journal and Other
Note : 1. Since cash purchases are not recorded in this book, hence, goods Subsidiary Books
purchased for cash on 25th January have not been recorded.
2. Since purchase of asset is also not recorded in this book, hence,
furniture purchased on 31st January has not been entered in this book.
3. Trade discount should be calculated and deducted before packing,
forwarding and other charges, are added to the bill. Notes
Posting from Purchase Book or Journal into Ledger
Posting of necessary details from Purchases Book/Journal is made on daily basis
into the relevant ledger accounts of suppliers on the credit side with the amount, date
and number of the invoice putting also page number of the Purchase Book into the
appropriate column of the ledger. Every transaction recorded in the Purchases Book
must be posted into the ledger account of the concerned supplier. For this purpose
every credit purchase which is recorded in the Purchases Book is posted into the
credit side of the respected creditors A/c by writing Purchases A/c. At the end of
the month, the grand total of the Purchases Book is posted to the debit side of
Purchase Account in the ledger writing in the particular column Sundries as per
Purchase Book.
To illustrate the posting from Purchase Book to concerned Ledger accounts may be
refer on the basis of previous Illustration No. 1 as follows :
Ledger
Dr. Malik Dealers Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
(`) (`)
2012 2012
Jan.04 Purchases A/c 26,920
Dr. Jawa Electric Store Cr.

(`) (`)
2012 2012
Dr. Jai Hind Traders Cr.

(`) (`)
2012 2012
ACCOUNTANCY 133
Journal and Other
Subsidiary Books Dr. Purchases Account Cr.
(`) (`)
2012 2012
Jan.31 To Sundries as per
Purchases Book 62,607
Notes
Purchases Return Book or Return Outwards Book or Purchases Return Journal
Sometimes goods purchased from the supplier are returned fully or partially on account
of various reasons such as supply of defective goods, spoiled in transit or it is not
upto mark as per our order etc. Such goods are returned to the supplier. For this
purpose a debit note, containing the required details of returned goods, is also
prepared and sent to the supplier for making necessary entries. If the number of
purchases returns is very few, it is recorded into the Journal Proper. But if the number
of Purchases returns is very high, the recording of such returned goods is done into
the Purchase Return Book. A specimen format of Purchase Returns Book is given
as under:
Purchase Returns Book
Date Particulars Debit L.F. Details Total
(Name of Supplier) Note No. (`) (`)
The explanation of above mentioned columns of the Purchase Returns Book is given
as follows:
Date : In this column, the day, month and year of the purchase returns transaction is
recorded in chronological order.
Particulars (Name of Supplier) : In this column, the names of supplier-firms, to
whom the goods were returned, are recorded.
Debit Note Number : In this column, debit note number is entered.
number is recorded for the purpose of cross-reference.
Details : The net amount after trade discount is recorded in this column.
Amount : In this column, net amount of Purchase Returns which is recoverable
from the supplier, is mentioned.
134 ACCOUNTANCY
Journal and Other
Enter the following transactions in purchases return book :
2012
Mar. 09 Goods Returned to Bala Ji ` 1,900.
Mar. 11 Goods returned to Kishan being not according to sample worth ` 1,400. Notes
Mar. 28 Allowance claimed from Mahabir and Bros. on account of mistake
in the invoice ` 200.
Mar. 31 Returned goods to Madan Lal & Sons, Delhi for ` 1,700 less trade
discount @ 10%.
Solution
Purchases Returns Book
Date Particulars Debit L.F. Details Total
Note No. (`) (`)
2012
Mar. 09 Bala Ji 1,900
Mar. 11 Kishan 1,400
Mar. 28 Mahabir & Brothers 200
Mar. 31 Madan Lal & Sons, Delhi 1,700
Less : Trade discount @ 10% 170 1,530
Mar. 31 Purchases Returns A/c Cr. 5,030
Posting from Purchase Returns Book /Journal into ledger

Posting of necessary details from Purchase Returns Book/Journal is made at the
time of goods returns, into the returned ledger account of supplier on the debit side
with the amount, date and number of the debit note. Page number of the Purchases
Returns Book is also put into the appropriate column of the ledger. At the end of the
month, the grand total of the Purchases Returns Book is posted to the credit side of
Purchase Returns Account in the ledger writing in the particular column Sundries as
per Purchases Return Book.
LEDGER
Dr. Bala Ji Cr.
(`) (`)
2012 2012
Mar.09 To Purchase
Return A/c. 1,900
ACCOUNTANCY 135
Journal and Other
Subsidiary Books Dr. Kishan Cr.
(`) (`)
2012 2012
Mar.12 To Purchase
Return A/c. 1,400
Notes
Dr. Mahabir & Bros. Cr.

(`) (`)
2012 2012
Mar.28 To Purchase
Return A/c. 200
Dr. Madan Lal & Sons Cr.

(`) (`)
2012 2012
Mar.31 To Purchase
Return A/c. 1,530
Dr. Purchses Returns Account Cr.

(`) (`)
2012 2012
Mar. 31 By Sundries as per
Purchases Returns Book 5,030

Which of the following transactions will be entered in the Purchases Book or Purchases
Returns Book or none of the said books?
i. Furniture purchased from M/S Saurabh Furniture.
ii. Goods purchased from M/S Keshav were returned to them as goods
were not according to the specifications.
iii. Goods of `12, 000 were purchased from M/S Warner Brothers for cash.
iv. M/S Puri & Sons supplied goods on credit for ` 1,500.
v. Purchased goods from Kwatra on credit for ` 2,000.
136 ACCOUNTANCY
Journal and Other
9.2 SALES BOOK/JOURNAL Subsidiary Books
If your firm transacts its sales on credit basis with large number of customers, it
will be convenient to maintain Sales Book as a journal of original entry for
recording all transactions of goods sold on credit by your firm. Transactions
related to selling of goods against cash are not recorded in Sales Book; these
Notes
are recorded in Cash Book. Similarly, any credit sales of items which are not
related to business goods will also not be recorded in the Sales Book; these are
recorded in Journal Proper.
When the goods are sold on credit, a copy of invoice/bill issued to customer is
kept by the seller; as an evidentiary proof to support concerned journal entry in
the sales book/journal. Such copy of invoice/bill contains various detailed
information related to transaction such as details of items sold, sales value, various
discounts (if any), various applicable charges, net amount receivable, terms and
conditions, date and serial number of invoice/ bill etc. Thus, all these necessary
information required for recording into Sales Book are available with the invoice/
bill.
A specimen format of Sales Book is given as under:
Sales (Journal) Book
Date Invoice Particulars L.F. Details Total
No. (Name of Customer) (`) (`)
The explanation of above mentioned columns of the Sales Book is as follows:

Date : In this column, the day, month and year of the transaction is recorded in
Invoice Number : In this column, Invoice/bill number is entered.
Particulars (Name of Customer) : The name of customer firm, to whom the
goods were sold, is written first in this column and is underlined. It is followed by the
detail of different items with their rates.
number of the customer party is put up for the purpose of cross-references.
Details : Only the net amount after trade discount if any should be recorded.
Amount : In this column, net receivable amount of the total goods sold to customer, is
mentioned in the appropriate currency as shown in the invoice/bill.
ACCOUNTANCY 137
Journal and Other
Subsidiary Books Illustration 3
Following are the transactions of M/s. Kamal & Bros. Prepare their Sales Day
Book :
Sold to M/s. Gupta & Sharma on Credit :
Notes 30 shirts @ ` 1,500 each
20 trousers @ ` 1,300 each
Less : Trade Discount @ 10%
Sold old furniture to M/s. Palik & Co. on credit ` 8,000.
Sold 50 shirts on credit to M/s. John & Sons @ ` 1,600 each
Sold on credit to M/s. Mahar and Nahar :
100 shirts @ ` 1,750 each
10 overcoats @ ` 1,500 each
Less : Trade Discount @ 10%
Solution
Sales Book
Date Invoice Particulars L.F. Details Total
No. (Name of Customer) (`) (`)
M/s. Gupta & Sharma :
30 shirts @ ` 1,500 each 45,000
20 trousers @ `. 1,300 each 26,000
71,000
Less: Trade Discount @ 10% 7,100 63,900
Sales as per Invoice No. . dated ......
M/s John & Sons :
50 shirts @ ` 1,600 each 80,000
Sales as per Invoice No. . dated ..
M/s. Mahar & Nahar :
100 shirts @ ` 1,750 each 1,75,000
10 overcoats @ ` 1,500 each 15,000
1,90,000
Less : Trade Discount @ 10% 19,000 1,71,000
Sales as per Invoice No. . dated
Sales A/c Cr. 3,14,900
Posting from Sales Book or Sales Journal into ledger

Posting of necessary details from the Sales Book/Journal is made on daily basis into
the relevant ledger accounts of the customer on the debit side with the amount, date
and number of the invoice putting also page number of the Sales Book into the
appropriate column of the ledger. At the end of the month, the grand total of the
Sales Book is posted to the credit side of Sales Account in the ledger writing in the
particular column Sundries as per Sales Book.
138 ACCOUNTANCY
Journal and Other
Ledger of M/s. Kamal & Bros. Subsidiary Books
Dr. M/s. Gupta & Sharma Cr.
(`) (`)
To Sales A/c. 63,900
Notes
Dr. M/s. John & Sons Cr.
(`) (`)
To Sales A/c. 80,000
Dr. M/s. Mahar & Nahar Cr.

(`) (`)
To Sales A/c. 1,71,000
Dr. Sales Account Cr.

(`) (`)
Sundries as per Sales
Book of the month of
February. 3,14,900
Sales Returns Book or Returns Inwards Book

When goods returned by the customers generally are recorded in a separate book,
named as Sales Returns Book. It is also called as Sales Returns Journal or Returns
Inward Book. The rules of recording in sales return Book is same as of Purchase
Return Journal. For this purpose a credit note, containing the required details of
returned goods, is also prepared and sent to the customer for making necessary
entries. The recording of such returned goods is done into the Sales Return Book on
the basis of information provided in the Credit Note. A specimen format of Sales
Returns Book is given as under:
Sales Returns Book
Date Credit Particulars L.F. Details Amount
Note No. (Name of Customer) (`) (`)
ACCOUNTANCY 139
Journal and Other
Subsidiary Books The explanations of above mentioned columns of the Sales Returns Book are given
as follows:
Date : In this column, the day, month and year of the sales returns transaction is
recorded in chronological order.
Notes Credit Note Number : In this column, credit note number is entered.
Particulars (Name of Customer) : In this column, the names of customer-firms,
by whom the goods were returned, are written in bold letters or underline it. Just
below it write the complete details of the goods returned including their price and
quantity.
number of the customer party is put up for the purpose of cross-references.
Details : Only the net amount after the trade discount should be recorded. The
prices should be the same at which the goods were sold.
Amount : In this column, net amount of sales returns, which is payable to the customer,
is mentioned in the appropriate currency as shown in the credit note.
Illustration 4
Prepare the sales Return Book in the books of Lal & Co. from the following
transactions:
2012
April 06 Goods returned by Pawan & Co. :
2 Table Fans @ ` 600 each
Less : Trade Discount 15%
April 12 Laxman Oil Mills returned defective goods valued ` 4,250.
Solution
Sales Return Book or Return Inwards Book
2012
April 06 Pawan & Co. :
2 Table Fans @ ` 600 each 1,200
Less : Trade Discount 15% 180 1,020
April 12 Laxman Oil Mills 4,250
April 30 Sales Return A/c Dr. 5,270
140 ACCOUNTANCY
Journal and Other
Posting from Sales Returns Book into Ledger Accounts Subsidiary Books
Each customer's account who returned the goods is credited with the net amount of
the returns. The total of the Sales Returns Book at the end of a specified period is
debited into the Sales Return Account in the ledger.
Illustration 5 Notes
Record the following in the Return Inwards Book.
2012
Jan. 01 M/s. Ghanshyam & Co. returned 500 units
Sold @ ` 50 per unit.
Jan. 25 M/s. Narain & Co. returned 300 units
Sold @ ` 55 pr unit.
Solution
Sales Return Book
2012
Jan. 01 M/s. Ghanshyam & Co. :
500 Units @ ` 50 per unit 25,000
Jan. 25 M/s. Narain & Co. :
300 Units @ ` 55 per unit 16,500
Jan. 31 Sales Return A/c Dr. 41,500
Ledger Book
Dr. Ghanshyam & Co. Cr.
(`) (`)
2012 2012
Jan. 01 By Sales Return A/c. 25,000
Dr. Narain & Co. Cr.

(`) (`)
2012 2012
Jan. 25 By Sales Return A/c. 16,500
Dr. Sales Returns Account Cr.

(`) (`)
2012 2012
Jan. 31 To sundries as per
Sales Return Book 41,500
ACCOUNTANCY 141
Journal and Other
Subsidiary Books Journal Proper
So far we have discussed that transactions of a particular nature are recorded in a
special journal maintained for the purpose.
1. Cash transactions are recorded in the Cash Book.
2. Credit purchases of goods or materials dealt in are recorded in the Purchases
Notes
Day Book.
3. Credit sales of goods are recorded in the Sales Day Book.
4. Returns from customers are recorded in the Sales Return Book.
5. Returns to suppliers are entered in the Purchases Return Book.
Apart from the above transactions, there are other transactions, which have to be
recorded. For them, the proper place is the journal proper. Entries recorded in the
Journal Proper are :
i. Opening Entry ii. Closing Entry
iii. Transfer Entries iv. Adjusting Entries
v. Rectifying Entries vi. Credit Purchase of Assets
vii. Credit Sale of Worn-out or Obsolete Assets

I. Which of the following transactions will be entered in the Sales Book
or Sales Returns Book? If the transaction is not to be entered in any
of two, write None of These.
i. Goods sold to Raghav on credit for one month.
ii. Old furniture sold to Rajesh on credit.
iii. Goods sold for cash.
iv. Goods sold to M/s Kapoor Pvt. Ltd.
v. M/S Deshbandhu & Sons Ltd. returned goods to us.
vi. Goods received back from Raghav due to defective consignment.
vii. Goods destroyed due by fire.
viii. Discount received from Suresh.
ix. Cash received from M/S Kapoor Pvt. Ltd.
i. Total of these transactions is posted in purchases account :
a) Cash purchase of Stationary b) Purchase Returns
c) Credit Purchases d) Purchase of Machinery
ii. The individual entries from the Sales Day Book are :
a) Not posted in any Account
b) Posted on the Credit side of Individual Account
142 ACCOUNTANCY
Journal and Other
c) Posted on the Debit Side of Individual Account Subsidiary Books
d) Posted in the Credit of Sales A/c
iii. The periodic totals of Sales Return Day Book is posted :
a) Sales A/c b) Sales Return A/c
c) Purchase Return A/c d) Goods A/c
iv. The totals of the Sales Day Book are posted to the credit side of : Notes
a) Sales A/c b) Sales Return A/c
c) Purchases Return A/c d) Goods A/c
v. The total of Purchases Day Book is posted to the Debit side of :
a) Sales A/c b) Purchases A/c
c) Goods A/c d) Purchase Return A/c

Purchases Day Book (also known as Invoice Book/Bought Book) is used
for the purpose of recording merchandise purchased (i.e., the goods in which
a business deals) on credit. In other words, the Purchases Day Book is a
book of primary entry, used for recording credit purchases. Cash purchases
are not recorded in the Purchases Day Book. It is recorded in the Cash Book.
Sales Day Book (also known as Day Book/Sales Journal) is used for the
purpose of recording the sale of merchandise on credit.
Purchases Return Book (also known as Return Outwards Book) is used
for recording all returns of goods purchased on credit.
Sales Return Book (also known as Return Inwards Book) is used for the
purposes of recording the return of goods sold on credit.
Journal Proper is used for making the original record of those transactions
which do not find a place in any other subsidiary book such as (i) Cash
Book, (ii) Purchases Day Book (iii) Sales Day Book and (iv) Purchases
Return Book.
Entries recorded in the Journal Proper are : Opening Entry, Closing Entry,
Transfer Entries, Adjusting Entries, Rectifying Entries, Credit Purchase of
Assets, Credit Sale of Worn-out or Obsolete Assets
TERMINAL EXERCISE
1. State the meaning of Purchases Book and draw its format.
2. State the meaning of Purchases Returns Book. Also draw its format.
3. What is meant by Sales Book? Draw its format.
4. State the meaning of Sales Returns Book. Draw its format.
ACCOUNTANCY 143
Journal and Other
Subsidiary Books 5. M/S Tyagi Furniture wants you to prepare sales journal for the month ended
31st March 2012, from the following details of sale of goods:
Date Details
2012
Mar. 4 Sold on credit to M/S Mona Traders: Vide Invoice No. 330
Notes (a) Two double beds @ ` 7,100 each.
(b) Five chairs @ ` 260 each.
Mar. 9 Sold on credit to M/S Kishan Furniture: Vide Invoice No. 238
5 tables @ ` 1,400 each.
Mar. 24 Sold on credit to M/S Darshan Furniture: Vide Invoice No. 340
4 sofa sets @ ` 18,000 each.
Mar. 30 Sold on credit to M/S Gopal Furniture: Vide Invoice No. 485
6 single beds @ ` 6,000 each.
6. Enter the following transactions in the proper books of M/S Devika Ltd. for
the month of July 2012:
2012
July 01 Bought from Kuldeep Traders as per invoice no. 7669
100 note books @ ` 20 each.
50 gel pens @ ` 10 each.
100 packets of color pencils @ ` 15 per packet.
Trade discount 10%
July 12 Bought from Abhimanyu Stationers as per invoice no. 3450
100 files @ ` Rs.12 per file
10 rim paper @ ` 300 per rim.
Trade Discount 5%
July 17 Returned to Savita Traders as per debit note no. 281
10 packets of color pencils @ ` 15 per packet.
Trade Discount @ 10%
July 22 Bought from Manik Stationery as per invoice no. 8760
50 packs of water color @ ` 50 per pack Net.
July 31 Returned to M/S Ritu Stationers as per debit note no. 340
3 rim paper @ ` 300 per paper.
Trade Discount 5%
7. Prepare Purchases Book from the following transactions and post it
into ledger :
2012
May 02 Boutht from Dhria & Co., Noida :
110 quintal rice @ ` 2,000 per quintal
115 quintal sugar @ ` 1,500 per quintal
Trade discount 10%
144 ACCOUNTANCY
Journal and Other
May 09 Purchased from Amit Kumar & Co., Alwar : Subsidiary Books
30 quintal wheat @ ` 1,800 per quintal.
20 quintal gram @ ` 1,700 per quintal.
May 15 Bought for cash from Gopal Agencies, Hisar:
220 tins ghee @ ` 500 each tin.
May 20 Bought furniture for office use from Bhagwati Furniture, Bhiwani:
Notes
70 chairs @ ` 200 each.
20 tables @ ` 1,200 each
Trade discount 10%
May 25 Bought from Gupta Traders, Ambala :
440 quintal rice @ ` 1,500 per quintal
210 quintal sugar @ ` 1,400 per quintal
Trade discount 10%, Sales tax 5%
8. Prepare Purchases Book of Electronics Bhiwani from the following
transactions of :
2012
Jan. 03 Bought from Sun Electricals, Ghaziabad :
100 tube lights @ ` 40 each.
500 table fans @ ` 500 each.
Trade discount @ 10%
Jan. 11 Purchased goods from Ravi Electric Company, Amroha :
300 bulbs @ ` 10 each.
240 Irons @ `. 200 each
Trade Discount @ 15%
Jan. 15 Bought furniture from Modern Furniture House, Delhi :
10 chairs @ ` 1,200 each
Jan. 20 Bought from Raftar Fans India, Delhi for cash :
50 fans @ ` 1,400 each
Jan. 28 Bought from Ram and Laxman Co., Delhi :
250 tube lights @ ` 45 each
9. Suresh Chand is trading as furniture dealer. The following information is
available :
2012
Nov. 06 Returned to Alok Kumar 50 chairs @ ` 230 per chair being
not of specified quality.
Nov. 14 Sent back one dining table to Gulshan Grover, Ludhina for
not being polished @ ` 4,300 and 10 chairs @ 250 each.
Nov. 21 Returned to Amrit Kaur & Co., Bhatinda, being not according
to sample :
30 chairs @ ` 425 each.
25 dressing tables @ ` 2,200 each
ACCOUNTANCY 145
Journal and Other
Subsidiary Books Nov. 27 Returned 12 study tables to Satkshi Furniture, Baurot @ `
1,500 being not of specified quality.
Record the above information in proper subsidiary books.
10. Enter the following transactions in returns inward book of Balwant Singh.
2012
Notes Sept. 07 Subhash and Sons, Kanpur returned goods being not according
to sample ` 12,000.
Sept. 18 Allowance claimed by Gandhi & Co., Delhi on account of
mistake in the invoice ` 1,000.
Sept. 21 Goods sold to Hari Ram Gopi Chand, Mumbai and returned by
him being defective in colour ` 1,800.
Sept. 28 Goods returned to us by Kamal & Bros., Kerala worth ` 1,500
less 10% trade discount.
11. Prepare Returns Inward and Returns Outward Book from the following
transactions:
2012
Jan. 04 Returned to Gopal Furniture, Hari Nagar :
40 chairs @ ` 200 each
Jan. 11 Rihan & Bros. returned us :
Jan. 16 Goyal & Co. returned the following :
2 Sofa Sets @ ` 13,000 each less 10% trade discount
Jan. 21 Returned to Premi Furniture House, Noida
10 tables @ ` 700 each
12. Enter the following transactions in Subsidiary Books.
2012
Sept. 01 Sold to Republic Furnishings, Noida :
2 bed @ ` 500 each
10 dining tables @ ` 3,000 each
Sept. 05 Purchase from Kaveri Furnitures, Meerut :
1 Dressing table ` 250 (net)
Sept. 08 Mohan Furniture invoiced the following :
1 office table @ ` 150
Sept. 10 Returned to Tara Chand & Co. :
7 bed-room suites @ ` 4,300 each
5 dinning tables @ ` 5,000 each
146 ACCOUNTANCY
Journal and Other
Sept. 16 Sold to Brij Mohan a dinning table for ` 5,000 Subsidiary Books
Sept. 18 Purchased from Lalit Khanna & Co. a delivery van for ` 85,000.
Sept. 22 Cash sales ` 12,000
You are required to prepare :
(i) Purchases Book
(ii) Sales Book Notes
(iii) Purchases Returns Book

9.1 (i) None (ii) Purchases Return Book (iii) None
(iv) Purchases Book (v) Purchases Book
9.2 I. (i) Sales Book (ii) None (iii) None
(iv) Sales Book (v) Returns Inward Book
(vi) Returns Inward Book (vii) None (viii) None
(ix) None
II. (i) c (ii) c (iii) b (iv) a (v) b

5. Total of Sales Book ` 1,18,500
6. Total of Purchases Book ` 10,090; Total of Purchases Returns Book ` 990.
7. Total of Purchases Book ` 13,42,780.
8. Total of Purchases Book ` 3,53,200.
9. Total of Purchases Returns Book ` 1,04,050
10. Total of Return Inward Book ` 16,150.
11. Total of Return Inward Book ` 53,100; Total of Return Outward Book ` 34,200.
12. Total of Purchases Book ` 400; Total of Sales Book ` 36,000; Total of
Purchas Returns Book ` 55,100.
ACTIVITIES FOR YOU
Visit some business units of your areas and enquire whether they are maintaining
only journal proper or other special purpose books. Ascertain whether the
books maintained by them serve the purpose or not. If not, give suggestions.
Asuming that your uncle is engaged in the business of stationary shop. Sit
with him for a week and prepare the list of items purchased and sold by him
through the week. Record all those transation in appropriate books.
ACCOUNTANCY 147

Jaspal Singh
Enrolment No.: Secondary - 27020212195
Senior Secondary 92279300066
Forced to discontinue his tenth class in 1993 in order to earn a livelihood

to support his family, when his parents met with an accident, Jaspal
Singh resumed his studies in 2003 by enrolling for the Secondary level
course in NIOS. The flexibility of the NIOS system enabled him to
pursue his studies along with his vocation. He acquired skills in fashion
designing while working as a freelancer in garment export houses.
Having completed his Senior Secondary course from the NIOS and
moved by the desire to continue studies, Jaspal Singh has managed to
obtain admission to a three year course in Fashion Management at the
University of Thames Valley, London.
Ms. Sudha
Enrolment No. : 27029182593
Ms. Sudha was a only housewife until such time that her husband passed
away and she was offered the job of a constable in the Delhi Police. She
then took up the job to support the family consisting of her two children.
Sudha who had not completed her schooling was motivated by her
children to join the NIOS. She then passed the Secondary examination
from NIOS in April 2009. A resident of Sant Nagar, Burari, Delhi and
posted at the Rohini Court, Delhi, Sudha today feels more confident and
empowered by the qualification acquired by her through the NIOS.
MODULE - III
14 34
Ledger and Trial Balance

This module will enable the learners to develop the skill of preparing the ledger and
trial Balance. They will be able to identify the different accounting errors, classify the
same and learn the ways to rectify the errors.
Lesson 10 : Ledger
Lesson 11 : Trial Balance and Accounting Errors
MODULE - III
Ledger and Trial
10
Balance
Notes
LEDGER
You have learnt to record business transactions in various books of accounts such
as Cash Book, Purchases Book, Sales Book, Journal etc. But the record in these
books is scattered. Purpose of accounting is to enable the businessman to get
knowledge of various items of revenue, expenditure, debtors, creditor, assets etc.
This can be made possible if all the concerned amounts recorded in different books
on different dates are brought under the respective heads at one place. This process
is called posting and the book that contains the various account heads is called
ledger. In this lesson you will learn the meaning of ledger and the purpose of preparing
the ledger.
OBJECTIVES
understand the meaning and purpose of Ledger;
differenciate between Journal and Ledger;
able to do the posting from Journal to Ledger and
develop the skill of balancing of Accounts in the Ledger.
10.1 MEANING AND PURPOSE OF LEDGER
All transactions related to a head of account are recorded in different books. To
know the total volume and value of transactions pertaining to a particular
account these have to be brought at one place. The book in which all accounts
are maintained is called Ledger. It contains the complete set of accounts for a
business entity. The process of preparing necessary ledger accounts and transferring
the information recorded in day books to these accounts according to accounting
rules is called ledger posting.
Ledger is the principal Book of double entry accounting system. It may be in the
form of a book or a bound register of separate sheets. Each account is opened on a
separate page or card.
150 ACCOUNTANCY
Ledger MODULE - III
Ledger and Trial
Purpose of Ledger Balance
i) Quick information about various transactions : Ledger sets the
relationship between the business enterprise and business transactions with
the help of an account.
ii) Proper control over transactions : Separate ledger accounts are
maintained for each type of transaction. Notes
iii) Helpful in preparing Trial Balance : The final balances of all ledger
accounts are shown in the Trial balance, which helps in ensuring that
books are arithmetically correct.
iv) Helpful in preparing Financial Statements : The financial statements of a
business concern are prepared with the help of trial balance which in turn is
prepared on the basis of the balance of different ledger accounts.
Format of a Ledger Account
Ledger account is prepared in T shape, which is basically divided into two parts.
Left side is known as Debit side and right side is known as Credit side.
The format of a ledger account is as follows :
Title of Account
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
(`) (`)
The following information is recorded in the various columns on both sides of a

ledger account :
Date : In this column, the date of a transaction is recorded.
Particulars : in this column the details of the transaction is recorded, on the debit
side, the word To and on credit side, the word By are prefixed.
Journal Folio (J.F.) : In this column the page number of book of original entry is
recorded.
Amount : The Amount of the transaction is recorded in this column.
10.2 DIFFERENCE BETWEEN JOURNAL AND LEDGER
S. Basis of Journal Ledger
No Difference
1. Entry Journal is the Book Ledger is the Book of
of Original entry Secondary Entry
ACCOUNTANCY 151
MODULE - III Ledger
Ledger and Trial
Balance 2. Record Journal is the Book for Ledger is the Book of
Chronological record analytical record
3. Classification Transaction is the basis Journal is the basis of
of Data of recording in the journal posting in the ledger
4. Process of Process of recording in the Process of recording in the
Notes Recording Journal is called journalizing ledger is known as ledger posting

Fill in the blanks with a suitable word
i. The book of account in which all accounts are maintained is called ______.
ii. Ledger is the__________ of double entry accounting system.
iii. Process of Recording in the Ledger is known as _______.
iv. ___________ is the basis of posting in the ledger.
v. Ledger is the book of _________ record.
10.3 POSTING OF THE JOURNAL ENTRIES INTO LEDGER
Ledger is the principal book of account. It is necessary to post the entire
information recorded in journal into different accounts in ledger. All the five
types of accounts Assets, Revenues, Expenses, Liabilities and Capital are opened
in the ledger. They will provide useful information when the entire information is
posted into them. Journal is the book of first entry (original entry) while the ledger is
the book of Final Entry. It gives the final position of each account relating to any
change in the account. Posting of Journal is the process of transferring the entire
information recorded in journal to the relevant accounts in ledger.
Procedure for Posting the Journal
There are two parts of a journal entry:
the debit part which comes first and
the credit part which comes later.
i) Posting the Debit Part
a) Debit part will be posted on the debit side of the relevant account in
ledger. After writing the date, record the name of the account credited
in journal in the particulars column. Add prefix To before writing
the name of the account. Then write the account e.g., To (name of
the account). Then write the amount in the amount column.
b) For reference record the page number of journal in the Folio
Column before amount column on the debit side.
152 ACCOUNTANCY
Ledger MODULE - III
Ledger and Trial
ii) Posting the Credit Part Balance
a) The credit part will be posted on the credit side of the relevant
account in ledger. After writing the date the name of the account
debited in journal will be written in the particulars column of
the account. The prefix By is generally used before the name
of the account in the particulars column e.g., By (name of the Notes
account). Then write the amount in the amount column.
b) For reference record the page number of Journal in the Folio
column on the credit side.
Example : Post the following journal entry into ledger.
JOURNAL
Dr. Cr.
(`) (`)
2012
Mar. 20 Cash Account Dr. 2,700
Jankidas 2,700
(Being Cash received from Jankidas)
LEDGER
Dr. CASH ACCOUNT Cr.
(`) (`)
2012
Mar. 20 To Jankidas 2,700
(name of the account
credited in journal.)
Dr. JANKIDAS Cr.

(`) (`)
2012
Mar. 20 By Cash Account 2,700
(Name of the account
debited in journal.)
Posting of the compound Entry into Ledger from Journal

If more than two accounts are involved in a transaction and only one entry has been
made for the transaction, it is called compound entry. There may be two accounts
in the debit part of the journal entry and one account in the credit part or there may
be one account in the debit part and two accounts in the credit part. Rule of posting
is the same as before, only the amounts are to be carefully written.
ACCOUNTANCY 153
MODULE - III Ledger
Ledger and Trial
Balance Example : Post the following journal entries into ledger.
Dr. Cr.
(`) (`)
2012
May 15 Bank Account Dr. 29,000
Notes Discount Allowed Account Dr. 1,000
Hari Mohan 30,000
(Being cheque received from Hari Mohan and
allowed him discount).
May 15 Kamal Dr. 15,000
Bank Account 14,900
Discount Received Account 100
(Being cheque given to Kamal and he allowed
discount of Rs. 100)
Solution
Posting into Ledger
Dr. Bank Account Cr
(`) (`)
2012
May 15 To Hari Mohan 29,000 May 15 By Kamal 14,900
Dr. Hari Mohan Cr

(`) (`)
2012
May 15 By Bank A/c 29,000
By Discount
Allowed A/c 1000
Dr. Kamal Cr
(`) (`)
2012
May 15 To Bank A/c 14,900
May 15 To Discount
Received A/c. 100
Dr. Discount Allowed Account Cr

(`) (`)
2012
May 15 To Hari Mohan 1,000
154 ACCOUNTANCY
Ledger MODULE - III
Ledger and Trial
Dr. Discount Received Account Cr Balance
(`) (`)
2012
May 15 By Kamal 100
Illustration 1 Notes
Pass the necessary journal entries for the following transactions and post them into
ledger :
Date Transaction Amount
2012 (`)
Jan. 15 Received cash from Mohan & Co. and 25,600
Discount allowed to them. 400
Jan. 16 Purchased Goods on Credit from Babu. 20,000
Jan. 17 Goods returned to Babu 5,000
Jan. 18 Drawings made for personal use in the form of :
Goods 1,000
Cash 1,000
Jan. 23 Paid rent 1,000
Paid Salaries 1,000
Solution
Journal
Date Particulars L.F. Dr (`) Cr (`)
2012
Jan.15 Cash A/c Dr. 25,600
Discount Allowed A/c Dr. 400
Mohan and Co. 26,000
(Being cash received and discount allowed)
Jan.16 Purchases A/c Dr. 20,000
Babu 20,000
(Being good Purchased on Credit)
Jan.17 Babu Dr. 5,000
Purchases Returns A/c 5,000
(Being goods returned to Babu)
Jan. 18 Drawings A/c Dr. 2,000
Cash A/c 1,000
Purchases A/c 1,000
(Being Cash and goods withdrawn by
proprietor for his personal use)
ACCOUNTANCY 155
MODULE - III Ledger
Ledger and Trial
Balance Jan. 23 Rent A/c Dr. 1,000
Salaries A/c Dr. 1,000
Cash A/c 2,000
(Being rent & salaries paid in Cash)
LEDGER POSTING
Notes
Dr. Cash Account Cr
(`) (`)
2012 2012
Jan. 15 To Mohan & Co. 25,600 Jan. 18 By Drawing A/c 1,000
Jan. 23 By Rent A/c 1,000
By Salaries A/c 1,000
Dr. Discount Allowed Account Cr

(`) (`)
2012
Jan. 15 To Mohan & Co. 400
Dr. Mohan & Co. Cr

(`) (`)
2012
Jan. 15 By Cash A/c. 25,600
By Discount
Allowed A/c. 400
Dr. Purchases Account Cr

(`) (`)
2012 2012
Jan. 16 To Babu 20,000 Jan. 18 By Drawing 1,000
Dr. Babu Cr
(`) (`)
2012 2012
Jan. 17 To Purchases Return A/c 5,000 Jan. 16 By Purchase A/c. 20,000
156 ACCOUNTANCY
Ledger MODULE - III
Ledger and Trial
Dr. Purchase Return Account Cr Balance
(`) (`)
2012
Jan. 17 By Babu 5,000
Notes
Dr. Drawing Account Cr
(`) (`)
2012
Jan. 18 To Cash A/c 1,000
To Purchases A/c 1,000
Dr. Rent Account Cr

(`) (`)
2012
Jan. 23 To Cash A/c. 1,000
Dr. Salaries Account Cr

(`) (`)
2012
Jan. 23 To Cash A/c. 1,000
Illustration 2
Pass the necessary journal entries for the following transactions and post them into
ledger :
Date Particulars Amount
2012 (`)
Feb. 1 Paid cash to Dinesh 16,800
Discount received 200
Feb. 2 Goods sold to Dinesh 20,000
Feb. 3 Goods returned by Dinesh 500
Feb. 5 Purchased goods on Credit from :
Ram 15,000
Hari 5,000
Feb. 6 Received commission in Cash 600
ACCOUNTANCY 157
MODULE - III Ledger
Ledger and Trial
Balance Solution
Journal
Date Particulars L.F. Dr. Cr.
2012 (`) (`)
Feb. 1 Dinesh Dr. 17,000
Notes
Cash A/c 16,800
Discount Received A/c 200
(Being cash paid to Dinesh and
discount received)
Feb. 2 Dinesh Dr. 20,000
Sales A/c 20,000
(Being goods sold to Dinesh)
Feb. 3 Sales Return A/c Dr. 500
Dinesh 500
(Being goods retuned by Dinesh)
Feb. 5 Purchases A/c Dr. 20,000
Ram 15,000
Hari 5,000
(Being goods purchase on credit)
Feb. 6 Cash A/c Dr. 600
Commission Received A/c 600
(Being commission received)
Ledger Posting
Dr. Dinesh Cr
(`) (`)
2012 2012
Feb. 1 To Cash A/c. 16,800 Feb. 3 By Sales's
Feb. 1 To Discount Return's A/c. 500
Reveived A/c. 200
Feb. 2 To Sales A/c. 20,000
Dr. Cash Account Cr

(`) (`)
2012 2012
Feb. 6 To Commission Feb. 1 By Dinesh 16,800
Received A/c. 600
158 ACCOUNTANCY
Ledger MODULE - III
Ledger and Trial
Dr. Discount Received Account Cr Balance
(`) (`)
2012 2012
Feb. 1 By Dinesh 200
Notes
Dr. Sales Account Cr
(`) (`)
2012
Feb. 2 By Dinesh 20,000
Dr. Sales Returns Account Cr

(`) (`)
2012
Feb. 3 To Dinesh 500
Dr. Purchase Account Cr

(`) (`)
2012
Feb. 5 To Ram 15,000
To Hari 5,000
Dr. Ram Cr
(`) (`)
2012
Feb. 5 By Purchase A/c. 15,000
Dr. Hari Cr
(`) (`)
2012
Feb. 5 Purchases A/c. 5,000
Dr. Commission Received Account Cr

(`) (`)
2012
Feb. 6 By Cash A/c. 600
ACCOUNTANCY 159
MODULE - III Ledger
Ledger and Trial
Balance

Following are the steps of posting of journal to ledger but are not in proper order.
Write them in correct order :
Notes a) Write the page number of journal in JF column of ledger account and
that of ledger in the LF column of journal.
b) Open the two affected accounts in the ledger.
c) Write date, amount of the debit account and have the credit account in
the ledger in their respective columns.
Posting of Opening Entry
In the beginning of every accounting period of a continuing business a journal
entry is passed to record the opening balance of all the assets and liabilities.
This entry is called opening entry. The posting of an opening entry is done
altogether in a different way. As all assets have debit balance so account of each
asset is opened in the ledger, on debit side by writing the word To Balance b/
d. Similarly, the liabilities and capital account have credit balance so account of
each liability is opened in the ledger on the credit side by writing the word By
Balance b/d.
In this way, posting of an opening entry is completed. All other entries are posted in
the usual way.
Example : Post the following opening entry into ledger:
Journal
2012 (`) (`)
April 1 Cash Account Dr. 70,000
Machine Account Dr. 2,10,000
Bank Account Dr. 70,000
Vipin (Debtor) Dr. 1,00,000
Capital Account 3,80,000
Hari Ram 50,000
Loan from HDFC Bank 20,000
(Being the opening entry)
160 ACCOUNTANCY
Ledger MODULE - III
Ledger and Trial
Solution Balance
Posting into Ledger
Dr. Cash Account Cr
(`) (`)
2012
Notes
Apr. 1 To Balance b/d 70,000
Dr. Machine Account Cr

(`) (`)
2012
Apr. 1 To Balance b/d 2,10,000
Dr. Bank Account Cr

(`) (`)
2012
Dr. Vipin Cr
(`) (`)
2012
Dr. Capital Account Cr

(`) (`)
2012
Apr. 1 By Balance b/d 3,80,000
Dr. Hari Ram's Account Cr

(`) (`)
2012
Apr. 1 By Balance b/d 50,000
Dr. Loan Account (HDFC Bank) Cr

(`) (`)
2012
Apr. 1 By Balance b/d 20,000
ACCOUNTANCY 161
MODULE - III Ledger
Ledger and Trial
Balance 10.4 BALANCING OF AN ACCOUNT
Balancing of accounts means totalling the two sides of an account and putting the
difference on shorter side. All Ledger accounts are usually closed and balanced at
the end of an accounting period. The following steps are taken for balancing the
accounts: -
Notes
Calculate the total of both the sides of a Ledger account, and find out the
difference.
If the debit side total exceeds the credit side total, write the difference on
credit side as By Balance c/d
If the credit side total exceeds the debit side total write the difference on
debit side as To Balance c/d
Write total amount on both the sides of the account.
Draw double line after the totals of an account.
Bring forward the balance on the next date on the other side. If debit balance
is brought down write To Balance b/d and if credit balance brought down
write By Balance b/d.
PROCESS OF BALANCING LEDER ACCOUNTS
Total Both the sides of a Ledger Account
Find out the Difference
If the Debit Side Total is more than If the Credit Side Total is more than
the Credit Side Total write the the Debit Side Total write the
Difference on the Credit Side as Difference on the Credit Side as
By Balance c/d' By Balance c/d'
Make the total of the Debit Side equal to the total of the Credit Side
Draw a double line after the totals
Carry forward the balance of the next date
If the Debit Balance, If the Credit Balance,

write on the Debit Side as write on the Credit Side as
To Balance b/d' To Balance b/d'
Types of Accounts that are Balanced : Normally, Capital account, Assets and
Liabilities accounts are balanced. Revenue and Expenses accounts are not
balanced but are closed by transferring the balance to Trading or Profit and
Loss Account at the end of the accounting year.
162 ACCOUNTANCY
Ledger MODULE - III
Ledger and Trial
Illustration 3 Balance
The following balances existed in the books of Good Look Garments on April 1, 2012.
Assets : Cash ` 5,800, Stock ` 5,000, Bheem ` 2,500, Dinesh ` 3,200,
Furniture ` 1,600
Liabilities : Suman Printers ` 3,600
Notes
Following transaction took place in April, 2012
April 2 Bought goods of the list price of ` 10,000 from Sat Narain, less 10%
trade discount and 2% cash discount and paid 60% price at the same
time.
April 6 Sold goods for cash ` 8,000 and on credit to Bheem for ` 4,600
April 10 Bought goods from Suman Printers, list price ` 4,000 valued at ` 3,800.
April 16 Paid cash to Suman Printers ` 3,400.
April 18 Sold goods for ` 1,200 to Krishna for Cash.
April 25 Bheem cleared his account in full, by payment of ` 7,000.
April 30 Paid salary for the current month ` 7,500.
Journalise the above transactions, post them into ledger, balance the accounts.
Solution
Journal of Good Look Garments
2012 (`) (`)
Stock A/c Dr. 5,000
Bheem Dr. 2,500
Dinesh Dr. 3,200
Furniture A/c Dr. 1,600
Suman Printers 3,600
Capital A/c (Balancing figure) 14,500
(Opening entry recorded in journal)
April 2 Purchases A/c Dr. 9,000
Cash A/c 5,292
Discount A/c 108
Sat Narain 3,600
(Goods purchased and 60% amount
paid immediately at 2% cash discount)
Bheem Dr. 4,600
Sales A/c 12,600
(Goods sold)
ACCOUNTANCY 163
MODULE - III Ledger
Ledger and Trial
Balance April 10 Purchases A/c Dr. 3,800
Suman Printer 3,800
(Goods purchased from
Suman Printers)
April 16 Suman Printers Dr. 3,400
Notes Cash A/c 3,400
(Cash paid to Suman Printers)
Sales A/c 1,200
(Goods sold to Krishna for cash)
Discount A/c Dr. 100
Bheem 7,100
(Cash received & discount
allowed to Bheem)
April 30 Salary A/c Dr. 7,500
Cash A/c 7,500
(Salary paid)
Total 62,700 62,700
Ledger of Good Look Garments
Dr. Cash Account Cr
(`) (`)
2012 2012
Apr. 1 To Balance b/d 5,800 Apr. 2 By Purchases A/c 5,292
Apr. 6 To Sales A/c 8,000 Apr. 16 By Suman Printers 3,400
Apr. 18 To Sales A/c 1,200 Apr. 30 By Salary A/c 7,500
Apr. 25 To Bheem 7,000 Apr. 30 By Balance c/d 5,808
22,000 22,000
May 1 To Balance b/d 5,808
Dr. Stock Account Cr

(`) (`)
2012 2012
Apr. 1 To Balance b/d 5,000 Apr. 30 By Trading A/c
(Transfer) 5,000
5,000 5,000
164 ACCOUNTANCY
Ledger MODULE - III
Ledger and Trial
Dr. Bheem Cr
Balance
(`) (`)
2012 2012
Apr. 1 To Balance b/d 2,500 Apr. 25 By Cash A/c 7,000
Apr. 6 To Sales A/c 4,600 Apr. 25 By Discount A/c 100
7,100 7,100 Notes
Dr. Dinesh Cr
(`) (`)
2012 2012
Apr. 1 To Balance b/d 3,200 Apr. 30 By Balance c/d 3,200
Dr. Furniture Account Cr

(`) (`)
2012 2012
Apr. 1 To Balance b/d 1,600 Apr. 30 By Balance c/d 1,600
Dr. Suman Printers Cr

(`) (`)
2012 2012
Apr. 16 To Cash A/c 3,400 Apr. 1 By Balance b/d 3,600
Apr. 30 To Balance c/d 4,000 Apr. 10 By Purchases A/c 3,800
7,400 7,400
May 1 By Balance b/d 4,000
Dr. Capital Account Cr

(`) (`)
2012 2012
Apr. 30 To Balance c/d 14,500 Apr. 1 By Balance b/d 14,500
.
Dr. Purchases Account Cr
(`) (`)
2012 2012
Apr. 2 To Cash A/c 5,292 Apr. 30 By Trading A/c 12,800
Apr. 2 To Discount A/c 108 (Transfer)
Apr. 2 To Sat Narain 3,600
Apr. 10 To Suman Printers 3,800
12,800 12,800
ACCOUNTANCY 165
MODULE - III Ledger
Ledger and Trial
Dr. Discount Account Cr
Balance
(`) (`)
2012 2012
Apr. 25 To Bheem 100 Apr. 12 By Purchases A/c 108
Apr. 30 To P&L A/c 8
Notes (Transfer) 108 108
Dr. Sat Narain Cr

(`) (`)
2012 2012
Apr. 30 To Balance c/d 3,600 Apr. 2 By Purchases A/c 3,600
Dr. Sales Account Cr

(`) (`)
2012 2012
Apr. 30 To Trading A/c 13,800 Apr. 6 By Cash A/c 8,000
(Transfer) Apr. 6 By Bheem 4,600
Apr. 18 By Cash A/c 1,200
13,800 13,800
Dr. Salary Account Cr

(`) (`)
2012 2012
Apr. 30 To Cash A/c 7,500 Apr. 30 By Profit & Loss A/c 7,500
7,500 (Transfer) 7,500

I. Fill in the blanks with suitable word / words :
i. Assets accounts always have _________ balance.
ii. Liability accounts always have _________ balance.
iii. The capital account generally has ___________ balance.
iv. The revenue and expenses accounts are closed by taking the balances
to ________.
166 ACCOUNTANCY
Ledger MODULE - III
Ledger and Trial
II. Balance the following accounts Balance
Dr. Joginder's Account Cr
(`) (`)
2012 2012
Feb. 1 To Sales A/c 6,000 Feb. 10 By Cash A/c 4,980
Notes
By Discount 20
Dr. Rent Receivable Account Cr

(`) (`)
2012 2012
Feb. 20 By Cash A/c 2,000
III. Multiple choice questions

i. The book in which all accounts of the firm are maintained is
known as :
a) Cash Book b) Ledger
c) Journal d) Day Book
ii. Which of the following is not the basic objective of preparing ledger?
a) To know debtors and creditors of the business.
b) To know financial position of the business.
c) To know effects of common transactions of the business.
d) To know whether proprietor has sold his house to invest
money in business.
iii. The ledger is a book of :
a) Original entry b) Secondary entry
c) All cash transactions d) Petty cash transactions
iv. Writing a transactions in the ledger is called
a) Casting b) Balancing
c) Journalising d) Posting
v. Basically ledger account is divided into two parts. Left side is known as
a) Credit side b) Debit side
c) Wrong side d) Right side

The book in which all accounts are maintained is called ledger.
The process of opening necessary ledger accounts and transferring the
information recorded in day books to these accounts according to
accounting rules is called ledger posting.
ACCOUNTANCY 167
MODULE - III Ledger
Ledger and Trial
Balance Purpose of ledger is :
To have information about various transactions.
Proper control over transactions.
Helpful in preparing Trial Balance.
Helpful in preparing Financial Statements.
Notes The debit item of journal is posted to the credit side of the relevant account
in the ledger.
The credit item of journal is posted to the debit side of the relevant account
in the ledger.
Name of the account in the journal is entered in particulars column of the
relevant account in the ledger.
TERMINAL EXERCISE
1. What is meant by Ledger? Why is Ledger prepared.?
2. Draw the Format of Ledger Account.
3. What is the difference between Journal and Ledger?
4. What is meant by balancing of an Account?
5. Journalize the following transactions and post them into Ledger and balance
the accounts :
2012 Particulars `
Apr. 1 Commenced business with cash 1,00,000
Apr. 3 Paid into Bank 30,000
Apr. 5 Purchased furniture for Cash 5,000
Apr. 8 Purchased goods and paid by cheque 15,000
Apr. 14 Purchased goods from Hari 35,000
6. Journalise the following transactions of Rathore and Post them into Ledger
2012 Particulars `
Jan. 1 Cash in hand 1,50,000
Jan. 1 Goods in hand 80,000
Jan. 1 Outstanding wages 20,000
Jan. 4 Paid for Charity 501
Jan. 4 Purchased goods from Akash 20,000
Jan. 5 Received rent from tenant 5,000
Jan. 18 Paid Cash to Akash on account 17,000
Jan. 22 Received interest on loan 1,750
Jan. 24 Magan returned goods 1,250
Jan. 26 Goods returned to Akash 2,000
168 ACCOUNTANCY
Ledger MODULE - III
Ledger and Trial
Jan. 29 Ram owed ` 4,000 became insolvent, and a final Balance
composition of 40 paise in a rupee was received
Jan. 31 Purchase of a Motor-cycle by Rathore for his son 42,000
7. On July 1, 2012; the following were ledger balances of Krishna. Cash in
hand ` 2,000; Cash at bank ` 12,000. Bills Payables ` 4,000; Ashok
Notes
(Debtor) ` 2,500; Stock ` 10,000; Charu (Creditor) ` 2,000; Other
transactions during the month were as follows:
2012 Particulars `
July 1 Bought goods from Charu 10,000
July 2 Sold goods to Surinder 21,000
July 3 Bought goods from Ram Lakhan 16,000
July 6 Sold goods to Paresha 8,000
July 12 Paid to Charu by cheque 16,000
July 20 Received from Surinder by cheque 8,900
Allowed him discount ,100
July 24 Sold goods to Surinder 18,000
July 25 Paid rent by cheque 2,000
July 25 Sold gods to Paresha 15,000
July 31 Paid Salaries 5,000
Give journal entries and post them to ledger.
8. Prepare Journal and post into ledger the following transaction of Mr.
Garib Chand and Sons.
2012 Particulars `
Apr. 1 Cash in hand 11,500
Apr. 1 Stock of goods in hand 12,500
Apr. 1 Bank Balance 20,000
Apr. 1 Due to Ramesh 1,000
Apr. 1 Due from Tara Chandani 2,000
Apr. 2 Sold goods to Manmohan 15,000
Apr. 7 Sold to Raghuvanshi 4,000
Apr. 9 Bought goods from Ramesh 1,250
Apr. 15 Sold goods to Tara Chandani 2,000
Apr. 18 Wages paid 400
Apr. 21 Received from Manmohan 6,000
Apr. 28 Proprietor took goods for personal use 1,000
Apr. 30 Paid Income Tax 5,000
ACCOUNTANCY 169
MODULE - III Ledger
Ledger and Trial
Balance
10.1 (i) ledger (ii) Principal Book (iii) Ledger posting
(iv) Journal (v) Analytical
Notes 10.2 b, c, a
10.3 I. (i) debit(ii) credit (iii) credit
(iv) Trading and Profit & Loss A/c
II. By balance c/d Rs. 1,000, To balance c/d Rs. 2,000
III. i) b ii) d iii) b iv) d v) b
ACTIVITY FOR YOU
Visit a shopping mall and observe the various activities performed by
businessmen/ shopkeepers. note down the activities with imaginary figures.
Prepare the journal of at least fifteen such activities and post these entries
from journal into ledger.
170 ACCOUNTANCY
MODULE - III
Ledger and Trial
11
Balance
TRIAL BALANCE AND Notes

ACCOUNTING ERRORS
You have learnt the method of recording transactions in journal and its sub-divisions.
You have also learnt their posting to various accounts in the ledger. This process of
recording and posting continues throughout the year. At the end of the year it becomes
necessary to check the arithmetical accuracy of the books of accounts before the
preparation of final accounts. For this purpose we prepare a statement called Trial
Balance. In this unit you will learn about the preparation of Trial Balance and the
extent up to which it can be relied upon for testing the accuracy of accounts. You will
also learn about the errors that may be disclosed and that may not be disclosed by
the preparation of Trial Balance and the method of locating such errors.
OBJECTIVES
After studying this chapter, you will be able to:
define trial balance;
describe the objectives of preparing a trial balance;
explain the causes of disagreement of a trial balance;
identify the types of errors disclosed and not disclosed by a trial balance;
describe the procedure for locating the errors;
explain the limitations of trial balance;
prepare the trial balance and
explain the meaning and disposal of suspense account.
11.1 MEANING OF TRIAL BALANCE
Numerous transactions take place in business everyday. They are first recorded in
books of original entry i.e., Journal Proper or one of its sub-divisions. Then they are
posted to the appropriate accounts in the ledger. Each ledger account is balanced
periodically so as to ascertain the net effect of various transactions posted therein. In
the process, some accounts may get closed; the final accounts are prepared for
ascertaining the profit or loss and the financial position of the business. The quality and
reliability of the results obtained depend, largely on the correctness of the entries made
ACCOUNTANCY 171
MODULE - III Trial Balance & Accounting Errors
Ledger and Trial
Balance in various books of accounts and their ledger posting. Hence, it is necessary to ascertain
the accuracy of these entries and ledger postings before we proceed with the preparation
of final accounts. For this purpose, we prepare a statement called Trial Balance,
which shows balances of all the ledger accounts. The names of each account having
debit balances are shown in the debit column and if it shows a credit balance, the
Notes amount is entered in the credit balances column. You know that the total of the debit
balances column must tally with the total of the credit balance column, because for
every debit there is a corresponding credit and vice versa. When the two totals tally, it
is considered as a preliminary proof of the arithmetical accuracy of the accounts. It is
an assurance that entries in the journal and posting into ledger have been correctly
done and that equality between debits and credits has been maintained throughout.
However, if the two totals do not tally it implies that there are some errors in the books
of accounts.
Trial Balance can thus, be defined as a statement (or a schedule) listing, in separate
columns, the debit and credit balances of all ledger accounts on a particular date. It
indicates that the books of accounts have been prepared in accordance with the
rules of double entry and ensures, to a great extent, the arithmetical accuracy of
accounting entries. Trial Balance provides a check on arithmetical accuracy of the
recording of financial transactions in different books such as journal and the ledger.
Such a check can be performed by preparing a statement called trial balance. Trial
balance is a statement prepared by taking up the debit and credit totals or balances
of all ledger accounts on a particular date.
11.2 OBJECTIVES OF PREPARING A TRIAL BALANCE
i) To check arithmetical accuracy : With the help of trial balance we can
identify the arithmetical error, committed by the accountant or his assistant,
because in such a situation the trial balance will not agree. Under such
situations it is assumed that some errors have been committed. After identifying
such errors the same are rectified.
ii) To prepare final accounts of the enterprise : Trial balance becomes the
basis of preparing final accounts. If we do not prepare trial balance and just
start preparing final accounts, it may be possible that we forget to record
some transactions that were not recorded while preparing the final accounts
because information about the same was not available at that time.
iii) Comparative study of each account : Trial balance helps in comparing
the present balance of an account with the previous period balance. By
preparing trial balance, we can estimate whether closing balance of
accounts will increase or decrease within two accounting periods. It can
also be used as a tool to decide whether there is need to decrease the rate
172 ACCOUNTANCY
Trial Balance & Accounting Errors MODULE - III
Ledger and Trial
of depreciation for showing improved profit position. Balance
iv) To make financial budget : Previous years trial balance figures are also
helpful to estimate the future amount. In other words, we can make different
financial budgets with the help of trial balance.
Notes
Given below are some statements. Some of these statements are correct and some
of these statements are incorrect. Write correct if the statement is correct and
incorrect if it is not correct.
i. Trial Balance is an essential part of the accounting process.
ii. Trial Balance is prepared only once in a year.
iii. If the totals of the two columns of a Trial Balance are equal it means
the posting has been done correctly.
iv. Debit Balances of the accounts are written in the Debit column and
Credit balances in the credit column of the Trial Balance.
v. The Assets and Expenses accounts have the credit balance.
11.3 CAUSES FOR THE DISAGREEMENT OF A TRIAL
BALANCE
As mentioned earlier, when the Trial Balance does not tally it means that some
errors have been committed while preparing the accounts. Let us, now analyze
the errors which usually affect the Trial Balance and lead to its disagreement.
i) Omission of posting in one account : You are aware that both the debit
and credit aspects of a transaction have to be posted in the ledger
accounts. If you post it to the debit of one account and forget its posting
to the credit of the other concerned account, it is bound to affect the
Trial Balance. For example, an amount of ` 200 received from Ali, correctly
entered on the debit side of the cash book but is not posted to the credit
side of Alis Account, because of this error the totals of the debit column of
the trial balance will be more than the total of the credit column and hence
the trial balance will not agree.
ii) Double posting in one account : If by mistake you post an entry two
times to the debit or to the credit of an account it would result in extra debit
or credit and as such cause disagreement in the Trial Balance for example `
4000 received from Ashok were credited twice in his account will increase
the total of the credit column by ` 4000 and the trial balance will not agree.
iii) Posting in the wrong side of an account : When an entry is posted in the
ACCOUNTANCY 173
Ledger and Trial
Balance wrong side of an account i.e. instead of debit side it is posted in the credit
side and vice-versa, it would also cause disagreement of the Trial Balance.
In such a situation, the difference will be for double the amount. For example,
` 300 received from Khan which is correctly entered on the debit side of
the Cash Book, but while posting it to Khans Account it is wrongly posted
Notes to the debit side of his account instead of the credit side. This would mean
that a debit of ` 600 (` 300 in Cash Account and ` 300 in Khans Account)
has no corresponding credit. With the result the total of the Credit column of
the trial balance will be lesser by ` 600.
iv) Posting wrong amount in an account : If you post an entry to the correct
side of an account but commit an error in writing the amount, this would
affect the Trial Balance. Suppose, in the above example you post the entry
correctly on the credit side of Khans Account but the amount is wrongly
written as ` 200. It would cause a difference of ` 100. In the Trial Balance,
the credit side will be lesser by ` 100.
v) Wrong Casting of the subsidiary books : If any subsidiary book is
overcast or undercast, it affects the concerned account in ledger. Suppose
the correct total of Sales Journal is ` 5,600, but it has been totalled as
` 5,300 when now posted to the credit of Sales Account, the Sales Account
will be short by ` 300, and the Trial Balance will not tally.
vi) Omitting to post the total of a subsidiary book : If the total of a
subsidiary book is not posted to the concerned account, it would affect the
Trial Balance. Such mistake relates only to the account where posting was
to be done and as such affects only one account. For example, if the totals
of the Sales Book ` 18,900 are not posted to the credit of Sales Account,
the credit side on the Trial Balance will be lesser by ` 18,900.
vii) Wrong totaling or balancing of an account : When an account is wrongly
totaled or wrongly balanced, this would affect the Trial Balance. Suppose
total of the debit side of Shyams Account has been written as ` 1,300
instead of ` 1,100. It would lead to wrong balance in Shyams Account.
Consequently, the debit total in the Trial Balance will be higher by ` 200.
Similarly, if the totaling is correctly done but a mistake is committed in balancing
the account, it would also cause a difference in the Trial Balance.
viii) Omission of an account from Trial Balance : You know that all accounts
which show some balance must be included in the Trial Balance. If you
forget to write the balance of any account in the Trial Balance, it will not
tally. In practice cash book balances are often omitted from Trial Balance.
174 ACCOUNTANCY
Ledger and Trial
ix) Writing the balance of an account in the wrong column of the Trial Balance
Balance : If the balance of an account which is to be shown in the debit
column of the Trial Balance is actually shown in the credit column, the Trial
Balances will not tally. It will be affected by double the amount.
x) Wrong totaling of the Trial Balance : If an error is committed in totaling
the amount columns of the Trial Balance itself, the Trial Balance will not tally. Notes
Thus, you have learnt about various errors which may cause difference in the Trial
Balance. Note that these errors affect only one aspect (debit or credit). This upsets
the debit-credit equality leading to the disagreement of the Trial Balance
11.4 ERRORS NOT DISCLOSED BY TRIAL BALANCE
Agreement of the trial balance is not a conclusive proof of the accuracy of the
accounts. There may be certain errors which might have been crept into the accounts
but do not affect the agreement of the trial balance. Such errors have been discussed
below :
i) Errors of Complete Ommission : If a transaction is completely omitted
from being recorded in the books of accounts, such an omission will not
affect the agreement of the trial balance for example a credit purchase of `
6000 from Ravi was omitted from being recorded in the Purchase Book.
Because of this omission the totals of the purchases book and Ravis account
will not be affected and hence trial balance will also not be affected.
ii) Errors of commission : These types of errors happen due to the negligence
of accountants and cannot be located by preparing trial balance. Suppose a
sales of ` 10,000 was recorded in books as ` 100. The balances both the
accounts i.e sales accountant and cash account will be affected only by `
100 and hence the trial balance will not be affected.
iii) Compensating Errors : Suppose, an accountant posted ` 500 less in the
debit side of purchase account and at the same time he also posted ` 500
less in credit side of sales account. In this case an error has been compensated
by another error. Such errors are called compensating error and will not
affect the trial balance.
iv) Errors of principles : When an accounting principle has been violated
while recording a transaction in the books of accounts, such errors are called
errors of principle e.g. the purchase of an asset if recorded in the purchases
account will be an error of principle but since the purchase account will be
debited and the suppliers accounts will be credited with the same amount
this error will not affect the trial balance
ACCOUNTANCY 175
Ledger and Trial
Balance 11.5 ERRORS DISCLOSED BY TRIAL BALANCE
If the Trial Balance does not tally, it will indicate that certain errors have been committed
which have affected the agreement of the Trial Balance. The accountant will then
proceed to locate such errors. On location such errors are rectified. Errors disclosed
by trial balance have been explained below:
Notes
i) Wrong Casting : If the total of the Cash Book or some other Subsidiary Book
is casted wrong, the Trial Balance will not tally. For example, the total of the
Purchase book has been casted ` 2000 more. When this total will be posted to
the debit side of the purchase account, it will also show an excess debit of `
2000 and hence, the Trial Balance will not agree.
ii) Posting to the Wrong Side of an Account : If instead of posting an amount
on the debit side of an account, it is posted on the credit side, or vice versa,
the Trial balance will not tally. For example, goods for ` 2,000 purchased
from Sohan. If instead of posting the amount on the credit side of Sohans
account it is posted to his debit, the debit side of the Trial Balance will
exceed the credit side by ` 4,000.
iii) Posting of Wrong Amount : The Trial Balance will not tally if the posting in
an account is made with an incorrect amount. For example, goods for ` 600
have been purchased from Anil. If, it has been correctly entered in the
Purchase Book or purchase account, but while posting to Anils account, in
credit side (correct side) the amount posted is ` 60 instead of ` 600, the
Trial Balance will not tally.
iv) Omission of Posting of One aspect of a Transaction : For example, if
` 500 has been received from Shyam and correctly entered in the Cash
Book but if it is omitted to be posted on the credit side of Shyams Account,
the Trial Balance will not tally.
v) Posting an amount twice in an Account : For example ` 500 has received
from Vinod and correctly entered in the Cash Book, but if it is posted twice
on the credit side of Vinods account, the Trial Balance will not tally.
vi) Errors of Totaling and Balancing of Accounts in the Ledger : Errors
may occur in the totaling of debit or credit sides of accounts in the
Ledger or in the balancing of accounts in the Ledger. Because the
balances of accounts are transferred to the Trial Balance, resulting in
transferring wrong balances in the Trial Balance. This will result into the
disagreement of the trial balance.
176 ACCOUNTANCY
Ledger and Trial
Balance

Fill in the blanks with suitable word or words
i. Trial Balance is said to have agreed when its _________ are equal.
ii. The agreement of Trial Balance is a proof of __________ accuracy of Notes
the ledger posting.
iii. There is a ___________ column and a _________ column for balances of
accounts in a Trial Balance.
iv. Cash in hand is written in the _________ column of the Trial Balance.
11.6 PROCESS OF LOCATING THE ERRORS
If an error exists in the books, it affects the accuracy of results of business operations
revealed by the financial statements. Therefore, the errors must be located for
rectification. The task of locating errors is, however not easy. The location of errors
will be easier if the following steps are systematically taken.
i. Check the total of the trial balance.
ii. Compare the ledger account balances carried to the trial balance.
iii. Verify the total of subsidiary books and their posting to ledger accounts.
iv. Verify that all journal entries have been correctly posted to the different
ledger accounts.
v. If you find that you have an unbalanced trial balance, in other words the
debits dont equal the credits, it indicates that some errors have been
committed during the course of accounting process. Such errors have to be
found and corrected. The first step in finding an error is to simply add the
credit and debit columns again to verify your totals. If they still dont agree
then subtract the smaller totals from the bigger and look for the missing
amount in the smaller column. If you find it, youve found your error.
vi. There are other standard techniques to track down an error in a trial balance.
If the debits and credits are not equal, see if the numeral 2 divides equally
the difference. If it does, look for an account, incorrectly in the column with
the larger total that equals half the difference. If you find this, youve found
your error.
vii. Another technique is to use the numeral 9 to find a transposition error. If the
numeral 9 divides evenly the difference between the credits and debits, you
have a transposition error. Go back over your credit and debit entries to try
to find your transposition error.
ACCOUNTANCY 177
Ledger and Trial
Balance 11.7 PREPARATION OF A TRIAL BALANCE
After recording all financial transactions in the subsidiary books and journal proper
the same are posted into the ledger. The ledger accounts are then, balanced. The
Balances of the ledger accounts are then transferred to the relevant columns of the
trial balance to verify that the debits are equal to the credits. The trial balance is the
Notes
next step in the accounting cycle. Trial balance is not an account. It is only a statement
that lists the balances of ledger accounts including cash and bank balances. It is
prepared on a particular date. It is prepared on a sheet with two amount columns for
debit and credit balances. The accounts having debit balances are entered in the
debit amount column and the accounts having credit balances are entered in the
credit amount column. The sum of each column should be equal. It is actually the
first step in the end of the accounting period process. In practice the trial balance
is prepared with debit and credit balances of various accounts in the ledger along
with balances in the cash book. The following is the format of a Trial Balance :
Trial Balance of (Name of the Firm)
As on (Date of Preparation)
Name of the Account Debit Balance Credit Balance
Amount (`) Amount (`)
It can be well understood with the help of the following example.

Example: Journalise the following transactions, post them into ledger, balance
the accounts and prepare a trial balance :
Date Particulars Amount
2012 (`)
May 1 Commission received 10,000
May 2 Rent paid 5,000
May 5 Interest received 6,000
May 7 Brokerage paid 2,000
178 ACCOUNTANCY
Ledger and Trial
Solution Balance
JOURNAL
Dr. Cr.
(`) (`) Notes
2012
May 1 Cash Account Dr. 10,000
To Commission received Account 10,000
(Being commission received)
May 2 Rent Account Dr. 5,000
To Cash Account 5,000
(Being rent paid)
May 5 Cash Account Dr. 6,000
To Interest received Account 6,000
(Being interest received)
May 7 Brokerage Account Dr. 2,000
To Cash Account 2,000
(Being brokerage paid)
Dr. Rent Account Cr

(`) (`)
2012 2012
May 2 To Cash A/c 5,000 May 31 By Balance c/d 5,000
5,000 5,000
June 1 To Balance b/d 5,000
Dr. Commission Account Cr

(`) (`)
2012 2012
May 31 To Balance c/d 10,000 May 01 By Cash A/c 10,000
10,000 10,000
June 1 Balance b/d 10,000
ACCOUNTANCY 179
Ledger and Trial
Balance Dr. Interest Received Account Cr
(`) (`)
2012 2012
May 31 To Balance c/d 6,000 May 5 By Cash 6,000
6,000 6,000
Notes June 1 By Balance b/d 6,000
Dr. Brokerage Account Cr

(`) (`)
2012 2012
May 7 To Cash 2,000 May 31 By Balance c/d 2,000
2,000 2,000
Dr. Cash Account Cr

(`) (`)
2012 2012
May 1 To Commission A/c 10,000 May 2 By Rent 5,000
May 5 To Interest May 7 By Brokerage 2,000
Received A/c 6,000 May 31 By Balance c/d 9,000
16,000 16,000
Trial Balance as on 31st May 2012

Name of Account Debit Credit
Balance (`) Balance (`)
Rent A/c 5,000
Brokerage A/c 2,000
Cash A/c 9,000
Commission A/c 10,000
Interest Received A/c 6,000
Total 16,000 16,000
11.8 LIMITATIONS OF A TRIAL BALANCE
i) As there are certain errors which are not disclosed by a trial balance.
Therefore again it can be said that the agreement of a trial balance is
not a conclusive proof of the accuracy of accounts.
ii) A trial balance gives only condensed information of each account.
180 ACCOUNTANCY
Ledger and Trial
iii) It does not give the information about the profit or loss made by the business Balance
in the accounting period.
iv) If trial balance is not prepared accurately, the final accounts prepared from
such a trial balance would not be reliable.
v) It does not ensure that all the transactions have been actually recorded in the
subsidiary books. Notes
vi) It is prepared only by those enterprises which make use of double entry
system.

Few errors have been committed in the books of Ram. State with reasons
which errors would affect the trial balance.
i. Sales ` 2500 to Shyam omitted from being recording in the books of
accounts.
ii. Purchase journal was overcast by ` 2000.
iii. Sales journal was under cast by ` 3000
iv. Amount paid to Anil wrongly posted to the debit of Sunils account.
v. Bank overdraft shown in the debit column in the trial balance.
vi. Sales of ` 3000 to Rohtas entered in sales journal as sales to Ram.
vii. Wages paid for installation of machine debited to wages account.
11.9 SUSPENSE ACCOUNT
When the trial balance does not agree, because of errors committed by the accountant
during the accounting process and he decides to prepare the final accounts then the
difference is written on the shorter column against an account called Suspense
Account. After wards the errors that affect the trial balance are rectified through the
suspense account. Once all such errors are rectified the suspense account opened
to artificially balance the trial balance will finally be balanced.

I. Fill in the blanks with suitable word or words :
i. If there is the error in totaling the Subsidiary Day Books, the
totals of Trial Balance will ______________.
ii. The Trial Balance will not agree if there is an error in carrying
out _________ from ledger.
iii. Agreement of Trial Balance is not a ___________ of the correctness
of posting.
ACCOUNTANCY 181
Ledger and Trial
Balance iv. When the total of the two columns of Trial Balance are not equal,
the difference is put in ___________ Account to make the Trial
Balance agree.
i. Which of the following errors will not affect the Trial Balance.
Notes a) Wrong balancing of an account
b) Writing an amount in the wrong account but on the correct
side
c) Wrong totaling of an account
ii. Which of the following is not the main objective of preparing a
Trial Balance ?
a) To check arithmetical accuracy
b) To prepare final accounts
c) To have comparative study of each account
d) To present trial balance in court as a proof of transaction
iii. Which of the following errors will affect the Trial Balance?
a) Repairs to buildings have been debited to building account
b) The total of purchases journal is Rs. 10,000 short
c) Carriage paid on new machinery has been debited to the
carriage account.
iv. Which of the following errors will be disclosed by Trial Balance?
a) Error of complete omission
b) Wrong casting
c) Compensating error
d) Error of Principles
v. Which of the following errors will not be disclosed by Trial
Balance?
a) Error of complete ommission
b) Posting of wrong amount
c) Posting an amount twice in an account
d) Posting to the wrong side of an account

It is necessary to prepare a Trial Balance before preparing the final accounts.
It verifies the arithmetical accuracy of the books of accounts.
182 ACCOUNTANCY
Ledger and Trial
When a Trial Balance does not tally, it means there are errors in books of Balance
account. A series of steps are taken to locate such errors.
There are certain errors which affect the Trial Balance and there are some
which do not.
Errors of principle, errors of complete omission, certain errors of commission
in subsidiary books, and the compensating errors are not disclosed by the Notes
Trial Balance.
The limitations of a trial balance are that it does not give the information
about the profit or loss made by the business in the accounting period
and trial balance gives only condensed information in a summary form for
each account.
Errors :
Compensating Errors : A group of errors wherein the effect of an
error is counter-balanced (or compensated) by the effect of one or
more errors, as a result of which the agreement of Trial Balance
remains unaffected.
Errors of Principle : An error committed by ignoring or misapplying
some principle of accounting while recording a transaction in the
books of account.
Errors of Complete Omission : When a transaction is completely
omitted from being recorded in the books of accounts the resultant
errors are called errors of complete omission.
Errors of Partial Omission : When transaction is partly omitted
from being recorded in the books of accounts the resultant errors
are errors of partial ommission.
Errors of Commission : A clerical error committed by the
accountant while recording or posting of a transaction is called error
of commission.
TERMINAL EXERCISE
1. Why do you consider Trial Balance as a test of the arithmetical accuracy of
the books of accounts? List the errors that will be disclosed by the Trial
Balance.
2. If the Trial Balance does not tally, it means there are some errors in
books of accounts. State the procedure of locating errors.
3. State the limitations of Trial Balance.
4. Is the Trial Balance a conclusive proof of the accuracy of the books of
accounts? Discuss the errors not disclosed by the Trial Balance.
ACCOUNTANCY 183
Ledger and Trial
Balance 5. Explain with examples the different types of errors that are usually committed
in recording of transactions?
6. What do you mean by Trial Balance? Discuss the objectives of preparing a
Trial Balance.
7. What is a Suspense Account? What does its appearance in Trial Balance
Notes indicate?
8. Prepare a Trial Balance of M/s Jai Jawan Jai Kisan Enterprises as on
31.12.2012 from the following balances.
Account Amount Account Amount
` `
Cash in hand 31,000 Sales A/c 76,000
Cash at Bank 12,000 Opening Stock 10,000
Capital A/c 80,000 Rent A/c 2,000
Drawings A/c 28,000 Wages A/c 6,000
Debtors A/c 20,800 Carriage Inward A/c 500
Creditors A/c 17,800 Machine A/c 1,500
Purchases A/c 62,000
Closing Stock 5,000
9. Prepare a Trial Balance as on 31.3.2013 from the following balances :
Account Amount
`
Cash in Hand 3,200
Cash at Bank 12,600
Capital A/c 27,450
Furniture A/c 12,300
Building A/c 15,000
Wages A/c 3,500
Sales A/c 20,000
Rent A/c 250
Bank Charges A/c 400
Depreciation A/c 200

11.1 (i) correct (ii) incorrect (iii)incorrect (iv) correct (v)incorrect
11.2 (i) debit and credit totals (ii) airthmatic (iii) debit, credit
(iv) debit
11.3 Errors ii), iii) and v) would affect the trial balance.
184 ACCOUNTANCY
Ledger and Trial
11.4 I. (i) not agree (ii) balance (iii) proof (iv) suspense Balance
II. (i) b (ii) d (iii) b (iv) b (v) a.

Notes
8. Total of Trial Balance ` 1,73,800.
9. Total of Trial Balance ` 47,450.
ACTIVITY FOR YOU
Ask your parents regarding the various expenditure and income of a particular
month, pass journal entries for the same and then post them in the ledger.
After closing the ledger accounts find the balances and prepare a trial balance,
which should be tallied, so as to ensure that the books of accounts prepared
by you are arithematically correct.
ACCOUNTANCY 185

MODULE - IV
12 32
Depreciation, Provisions and Reserves

This module will help the learners to understand the methods of spreading the cost
of fixed assets throughout their working life using the concept of Depreciation. They
will also be able to describe the need and importance of creating Provisions and
Reserves.
Lesson 12 : Depreciation
Lesson 13 : Provisions and Reserves
MODULE - IV
Depreciation, Provision
12
and Reserves
Notes
DEPRECIATION
Expenditure on assets of the business like furniture, fixtures and fittings of the shop,
motor vans, machines and equipments are neither goods nor expenses of a year.
Expenditures of this nature give services to the business for many years and therefore
called fixed assets. If the expenditure on the fixed assets is deducted from the profit
of any one year, it would be wrong. Since their benefit is enjoyed by the business for
more than one years. The correct thing will be to distribute their cost over the years
of their useful life to the business. The portion of the cost of fixed assets charged
each year as expense is named as depreciation.
In this lesson you will learn about the meaning and methods of charging depreciation
and how depreciation is recorded in the books of accounts, together with the
preparation of Fixed Assets account.
OBJECTIVES
understand the meaning and concept of depreciation;
explain the causes of depreciation;
explain the objectives of depreciation;
learn methods of charging depreciation and
prepare fixed asset account showing the amount of depreciations charged
for every year.
12.1 MEANING OF DEPRECIATION
You already know the meaning of terms assets and liabilities. Assets are broadly
divided in to two categories- current assets (cash, debtors or customers balances,
stock of materials and goods) and fixed assets (buildings, furniture and fixtures,
machinery and plant, motor vehicles).
Fixed assets are also called long term assets as they provide benefits to the
business for more than one year. Most fixed assets loose their value over time
as these are put in use and as the years pass by. The fixed assets loose their
188 ACCOUNTANCY
Depreciation MODULE - IV
usefulness due to arrival of new technologies and change of fashions etc. These are and Reserves
then generally required to be replaced, as their useful life is over. Hence, the cost of
a fixed asset is allocated over its useful life. Each years allocation of the cost is
charged as depreciation expense for that year.
For example an office chair is purchased for ` 2,500 and it is estimated that after ten
years it will be scraped. The useful life of the chair is ten years over which the cost of Notes
` 2,500 will be distributed. Each years allocation may be calculated as:-
Cost of Assets Scrap Value (if any)

Depreciation =
Life of Assets
` 2500
= ` 250
10
Thus ` 250 is the depreciation expense for each year.

Thus, depreciation is an expense charged during a year for the reduction in the value
of fixed assets, arising due to:
Normal wear and tear out of its use and passage of time
Obsolescence due to change in technology, fashion, taste and other market
conditions
12.2 CAUSES OF DEPRECIATION
Following are the causes for which depreciation is provided in accounts.
i) Normal wear and tear
(a) Due to usage - Every asset has a life for which it can run, produce
or give service. Thus, as we put the asset to use its worth
decreases. Like decrease in the efficiency and functioning of a
bicycle due to its running and usage.
(b) Due to passage of Time As the time goes by elements of nature,
wind, sun, rain etc, cause physical deterioration in the worth of
an asset. Like reduction in the worth of a piece of furniture due
to passage of time even when it is not used.
ii) Obsolescence
(a) Due to development of improved or superior equipment :
Sometimes fixed assets are required to be discarded before they
are actually worn out due to either of the above reasons. Arrival
of superior equipments and machines etc. allow production of
goods at lower cost. This makes older equipments worthless as
production of goods with their use will be costlier and non
ACCOUNTANCY 189
MODULE - IV Depreciation
and Reserves competitive. For example, Steam engines became obsolete with the
arrival of diesel and electric locomotives.
(b) Due to change in fashion, style, taste or market conditions :
Obsolescence may also result due to decline in demand for
certain goods and services with a change in fashion, style, taste
Notes or market conditions. The goods and services that are no longer
in vogue lead to decrease in the value of the assets which were
engaged in their production - like factories or machines meant
for making old fashioned hats, shoes, furniture etc.
Loss in the value of fixed assets for such reasons is called obsolescence and also
charged as depreciation.
12.3 OBJECTIVES OF DEPRECIATION
Following are the objectives of charging depreciation of Assets:
i) To show the True Financial Position of the Business : As are Fixed
Assets have some effective working life during which it can be economically
operated. Depreciation is the gradual loss in the value of fixed assets. If
depreciation is not provided, profit and loss A/c will not disclose the true profit
made during the accounting period. At the same, the Balance Sheet will not
disclose the true Financial position as Fixed assets appearing in the Balance
Sheet will be over valued. If depreciation is ignored year after year, ultimately
when asset is worn out, the proprietor will not be is a position to continue the
business smoothly.
ii) To retain funds in the business for replacement of the asset : Net
profit is the yield of the capital invested by proprietor and may be wholly
withdrawn by him in the form of cash. If depreciation is provided, this
figure of net profit will be reduced and the amount withdrawn by the
proprietor will also be decreased. As such the cash equivalent to the
change for depreciation will be left over the business. This accumulated
amount will enable the proprietor to replace a new asset.

i. Depreciation represents a __________ in the value of fixed assets.
ii. Scrap value of an asset means the _________ that it fetched on sale at
the end of its __________.
iii. Depreciation is calculated as cost of assets less scrap value divided by
__________.
190 ACCOUNTANCY
iv. Obsolescence is one of the situations on fixed assets which arises due to and Reserves
change in ________, and fashion, taste and other market conditions.
12.4 FACTORS AFFECTING THE DEPRECIATION
Following are the factors that affect the amount of depreciation of an asset.
Notes
i) Cost of Asset : Cost of asset is the purchase price of the asset and includes
all such expenses which are incurred before it is first put to use. For example
expenses on loading, carriage, installation, transportation and unloading of
the asset up to the point of its location, expense on its erection and assembly.
ii) Useful Life of the Asset : Useful life is the expected number of years for
which the asset will remain in use.
iii) Scrap Value : Scrap value is the residual value at which the asset could be
sold to scrap dealer (Kabari) after its useful life.
iv) Depreciable value of asset : Depreciable value is the cost of asset minus
the scrap value.
Illustration 1
A generator was purchased for ` 5,00,000. ` 1,500 was paid for the crane for its
loading on the truck, ` 7,000 was paid for transporting the generator to the factory.
` 2,000 was spent on its unloading at the factory site. The generator was estimated
to run for 10 years and thereafter would be saleable for ` 60,000. Calculate the
depreciable value of the generator.
The cost of the asset is : Purchase price ` 5,00,000
Expenses on Loading ` 1,500
Transportation ` 7,000
Expenses on unloading ` 2,000
Total ` 5,10,500
The useful life of the generator is 10 years
The scrap value is ` 60,000.
Depreciable value of the generator = ` 5,10,500 ` 60,000 = ` 4,50,500
ACCOUNTANCY 191
and Reserves 12.5 METHOD OF CHARGING DEPRECIATION
Most popularly used methods for charging depreciation are: i. Straight Line Method
and ii. Diminishing Balance Method
Straight Line Method of Depreciation
Notes
Under this method, the amount of depreciation is uniform from year to year. Suppose,
if an asset costs ` 1,00,000 and depreciation is fixed @ 10%, then ` 10,000
would be written off every year. That is why this method is also called Fixed
Installment Method or Original Cost Method. In this method, the amount to be
written off every year is arrived at as under:
Cost of Assets Estimated Scrap Value
Depreciation of Each Year =
Number of years of expected life
Out of the cost of the asset, its scrap value is deducted and it is divided by the
number of years of its estimated life.
For example: a machine is purchased for ` 1,20,000 and it is estimated that its
useful life is 10 years. After its useful life its scrap value is ` 20,000. Depreciation
of one year can be calculated as under:
` 1,20,000 ` 20,000
Depreciation of one Year = = ` 10,000
` 10
If its scrap cannot be sold or no money can be realized from its scrap, then
depreciation of one year is:
` 1,20,000
Depreciation of one Year = = ` 12,000
` 10
In this method the amount of depreciation is same for each year. Therefore this
method is called Straight Line Method, Fixed Installment Method or Original
Cost Method.
Illustration 2
A machine was purchased on January 1, 2011 for ` 1,00,000 and its useful life is 10
years. After completing its useful life the machine will be scraped and nothing will be
realized from it. It is decided to charge depreciation on this machine @ 10% p. a. on
Straight Line Method.
Calculate amount of depreciation for each year during the useful life of this machine.
Year Rate of Amount of
Depreciation Depreciation (`)
2011 10% 10,000
192 ACCOUNTANCY
2012 10% 10,000 and Reserves
2013 10% 10,000
2014 10% 10,000
2015 10% 10,000
2016 10% 10,000
2017 10% 10,000 Notes
2018 10% 10,000
2019 10% 10,000
2020 10% 10,000
Amount of depreciation is same in every year, so this method is called Straight Line
Method or Fixed Installment Method or Original Cost Method.
12.6 MERITS OF STRAIGHT LINE METHOD
i) Simplicity : Calculation of depreciation under this method is very simple and
therefore the method is widely popular. Once the amount of depreciation is
calculated, the same amount is written off as depreciation each year. Hence this
method is simple and calculations are easier to understand.
ii) Asset is completely Written Off : Under this method, the book value of
an asset is reduced to net scrap value or zero value. In other words, in the
books of accounts the value of the asset at the end of its useful life is equal to
zero or its residual value.
12.7 LIMITATIONS OF STRAIGHT LINE METHOD
i) Difficulty in Computation : When there are various machines having
different life-spans, the computation of depreciation becomes
complicated because the depreciation on each machine will have to be
calculated separately for each asset.
ii) Illogical : It is well known that the expense on its repairs and maintenance
increases as the asset becomes older. Thus, the total burden on Profit and
Loss Account, depreciation plus repair expenses, is more in later years in
comparison to earlier years. This is illogical because the efficiency and
productivity of the asset is more in earlier years and less in later years.
Illustration 3
X limited purchased a machine on April 1, 2011 for 1,00,000 whose life was
expected to be 10 years. Its estimated scrap value at the end of 10 years was
10,000. Find the amount of depreciation to be charged to Profit and Loss Account
every year. Calculate the rate on which depreciation is to be charged every year.
ACCOUNTANCY 193
and Reserves Solution
In this question the information available is as under: The amount of depreciation that
will be charged to Profit and Loss Account will be calculated as :
(i) Calculation of amount of depreciation
Notes Cost of Machine Estimated Scrap Value
Annual Depreciation =
Expected Life of the Asset
` 1,00,000 ` 10,000
= = ` 9,000
` 10
(ii) Calculation of Rate of Depreciation

Annual Depreciation Amount X 100
Rate of Depreciation =
Cost Asset
` 9,000 X 100
= = 9%
` 1,00,000
Illustration 4
Salman and Usman Bros. acquired a machine on July 1, 2008 at a cost of ` 70,000
and spent ` 5,000 on its installation. The firm writes off depreciation @ 10% on
straight line method. The books are closed on December 31 every year. Show the
machinery and depreciation account for three years.
Solution
Cost of Machine ` 70,000
Cost of Installation ` 5,000
Total ` 75,000
Rate of Depreciation is 10%.
Then annual depreciation will be 10% of 75000 = ` 7,500.
Dr. Depreciation Account Cr.
2008 2008
Dec. 31 To Machinery A/c 3,750 Dec.31 By P & L A/c 3,750
2009 2009
2010 2010
194 ACCOUNTANCY
Dr. Machinery Account Cr.
and Reserves
Date Particulars J.F. ` Date Particulars J.F. `
2008 2008
July 01 To Bank A/c 70,000 Dec. 31 By Depreciation A/c 3,750
10 6
7000
100 12 Notes
July 01 To Bank A/c 5,000 Dec. 31 By Balance c/d 71,250
75,000 75,000
2009 2009
Jan. 01 To Balance b/d 71,250 Dec. 31 By Depreciation A/c 7,500
10
75000
100
By Balance c/d 63,750
71,250 71,250
2010 2010
Jan. 01 To Balance b/d 63,750 Dec. 31 By Depreciation A/c 7,500
10
75000
100
Dec. 31 By Balance c/d 56,250
63,750 63,750
Illustration 5
On April 1, 2006, a company purchases machinery worth ` 1,00,000 . On October
1, 2008, it purchased additional machinery worth ` 20,000 and spends ` 2,000 on
its erection. The accounts are closed each year on March 31. Assuming the annual
depreciation to be 10%, show the Machinery Account for 5 years under the straight
line method.
Solution
2006 2007
Apr. 01 To Bank A/c 1,00,000 Mar. 31 By Depreciation A/c 10,000
10
100000
100
Mar. 31 By Balance c/d 90,000
1,00,000 1,00,000
2007 2008
Apr. 1 To Balance b/d 90,000 Mar. 31 By Depreciation A/c 10,000
10
100000
100
90,000 90,000
ACCOUNTANCY 195
and Reserves 2008 2009
10
Oct. 1 To Bank A/c 20,000 100000
100
10 6
22000
Notes 100 12
To Bank A/c 2,000 Mar. 31 By Balance c/d 90,900
1,02,000 1,02,000
2009 2010
10
100000
100
10 6
22000
100 12
90,900 90,900
2010 2011
10
100000
100
10 6
22000
100 12
78,000 78,700
2011
Illustration 6
On 1st January, 2003 a Company purchased a plant for ` 20,000. On 1st July in the
same year, it purchased additional plant worth ` 8,000 and spent ` 2,000 on its
erection. On 1st July, 2004, the plant purchased on 1st jan., 2003 having become
obsolete, was sold off for ` 12,500. On 1st October, 2005, fresh plant was purchased
for ` 28,000 and on the same date, the plant purchased on 1st July, 2003 was sold
at ` 6,000.
Depreciation is provided at 10% per annum on original cost on 31st December
every year. Show the plant account for 2003 to 2005.
196 ACCOUNTANCY
Solution and Reserves
Dr. Plant Account Cr.
2003 2003
Jan. 01 To Cash A/c 20,000 Dec. 31 By Depreciation A/c
July 01 To Cash A/c 8,000 (i) for a year 2,000 Notes
To Cash A/c (ii) for six months 500 2,500
(expenses) 2,000 By Balance c/d
(i) 18,000
(ii) 500 27,500
30,000 30,000
2004 2004
Jan. 1 To Balanc b/d July 1 By Cash A/c (sale) 12,500
(i) 18,000 Dec. 31 By Depreciation A/c (i) 1,0001
(ii) 9,500 27,500 By Profit & Loss A/c 4,5001
July 1 By Depreciation A/c (ii)
1,000
Dec. 31 By Balance c/d
(` 9,500 - ` 1,000) 8,500
27,500 27,500
2005 2005
Jan. 1 To Balance b/d (ii) 8,500 Oct. 1 By Cash A/c (sale) 6,000
Oct. 1 To Cash A/c (iii) 28,000 Oct. 1 By Depreciation A/c (ii) 7502
Oct. 1 By Profit & Loss A/c (loss) 1,750
Dec. 31 By Depreciation A/c (iii)
(28,000x10/100x3/12) 700
Dec. 31 By Balance c/d
(` 28,000 - ` 700) 27,300
36,500 36,500
Note : Calculation of loss on sale of plant :

`
(i) On 1-1-2004 book value of the plant sold [Plant (i)] 18,000
Less : Depreciation for 6 months i.e. 20,000 x 10/100 x 6/12 1,000
On 1-7-2004 book value of plant sold 17,000
Less : Sale price of plant 12,500
Loss on sale of plant 4,500
(ii) On 1-1-2005 book value of plant sold [Plant (ii)] 8,500

Less : Depreciation for 9 months is 10,000 x 10/100 x 9/12 750
On 1-10-2005 book value of plant sold 7,750
Less : Sale Price 6,000
Loss on Sale of Plant 1,750
ACCOUNTANCY 197
and Reserves
i. The assumption underlying the fixed installment method of depreciation
Notes is that the amount of the fixed assets over different years of its useful life
remain the _________.
ii. Straight line method of charging depreciation is also known as _________
or ________.
iii. Under straight line method the value of the assets at the end of its useful
life is equal to __________ or its ___________.
iv. Under straight line method the total burden on Profit and Loss Account in
Comparision to earlier years is _____________.
12.8 DIMINISHING BALANCE METHOD
Under this method, as the value of asset goes on diminishing year after year, the
amount of depreciation charged every year goes on declining. The amount of
depreciation is calculated as a fixed percentage of the diminishing value of the asset
shown in the books at the beginning of each year. Under this method the value of an
asset never comes to zero.
Suppose, the cost of the asset is ` 40,000 and the percentage to be written off
each year is 10%. In the first year the amount of the depreciation will be ` 4,000
i.e., 10% of ` 40,000. This will reduce the book value to ` 36,000 i.e.
` 40,000 ` 4,000. Now, at the beginning of the next year the book value is `
36,000. The amount of the depreciation for the next year will be ` 3,600, i.e.,
10% of ` 36,000. Thus, every year the amount of the depreciation will go on
reducing. This method of charging depreciation is also known as Reducing Balance
Method or written down value method.
Illustration 7
A machine was purchased on January 1, 2011 for ` 1,00,000 and its useful life is 10
years. After completing its useful life the machine will be scraped and ` 4,000 will be
realized from it. It is decided to charge depreciation on this machine @ 10% p. a. on
Diminishing Balance Method.
Calculate amount of depreciation for each year during the useful life of this machine.
198 ACCOUNTANCY
Solution and Reserves
Year Rate of Depreciation Amount of Depreciation
2011 10% 10,000
2012 10% 9,000
2013 10% 8,100
Notes
2014 10% 7,290
2015 10% 6,561
2016 10% 5,905
2017 10% 5,314
2018 10% 4,783
2019 10% 4,305
2020 10% 3,874
Amount of depreciation is decreased year after year in this method that is why
this method is called Diminishing Balance Method or Reducing balance
method or written down value method.
12.9 MERITS OF DIMINISHING BALANCE METHOD
i) Equal Burden on Profit & Loss Account
The productivity of the asset is more hence its contribute to profit is also relatively
greater. Therefore the cost charged in terms of depreciation should also be
greater.
In the initial year, the depreciation charges are more and repair expenses are less. In
later years, depreciation charges are less and repair expenses are more. Hence the
total burden, depreciation plus repair expenses, is some what equal on Profit &
Loss Account for each year.
12.10 DEMERITS OF DIMINISHING BALANCE METHOD
i) Asset cannot be completely written off : Under this method, the value of
an asset is not reduced to zero even when there is no scrap value.
ii) Complexity : Under this method, the rate of depreciation cannot be
determined easily.

Fill in the blanks with suitable words
(i) Depreciation represents a ________ in the value of fixed assets.
(ii) The amount of depreciation on machinery is credited to ______ account.
(iii) Depreciation is calculated on _______ under the straight line method.
ACCOUNTANCY 199
and Reserves (iv) Depreciation is calculated on ________ under the diminishing balance
method.
(v) The value of an assets is not reduced to ________ even when there is no
scrap value in diminishing balance method of depreciation.
Illustration 8
Notes
Widson enterprise purchases Plant and Machinery for ` 1,00,000 on 1st October
2012. It decides to write off depreciation 20% per annum on Written Down Value
Method. On 1st January, 2015 purchases additional Machinery for ` 40,000.
Show Machinery Account upto the year ending 31st March, 1996. The
accounting year ends on 31st March.
Solution
Dr. Plant and Machinery Account Cr.
2012 2013
Oct. 01 To Bank 1,00,000 Mar. 31 By Depreciation 10,000
(for six months)
1,00,000 1,00,000
2013 2014
Apr. 01 To Balance b/d 90,000 Mar. 31 By Depreciation 18,000
(on ` 90,000 for
one year)
90,000 90,000
2014 2015
Apr. 01 To Balance b/d 72,000 Mar. 31 By Depreciation
(On ` 72,000)
2015 for one year `
Jan. 01 To Bank 40,000 14,400 On
` 40,000 for
3 months ` 2,000 16,400
1,12,000 1,12,000
2015 2016
Apr. 01 To Balance b/d 95,600 Mar. 31 By Depreciation 19,120
(On ` 96,600
for one year)
95,600 95,600
2016
200 ACCOUNTANCY
Illustration 9 and Reserves
On April 1, 2009 Ganga Bros. purchased two machines for ` 75,000 each.
Depreciation at the rate of 10% on diminishing balance method was provided.
On March 31, 2011, one machine was sold for ` 55,000. An improved model
with a cost of ` 80,000 was purchased on the same day. You are required to
show the Machinery Account for 2009-10 to 2010-11. Notes
Solution
2009 2010
Oct. 01 To Bank 1,50,000 Mar. 31 By Depreciation A/c 15,000
Mar. 31 By Balance c/d 1,35,000
1,50,000 1,50,000
2010 2011
Apr. 01 To Balance b/d 1,35,000 Mar. 31 By Depreciation A/c 13,500
Mar. 31 To Bank A/c 80,000 Mar. 31 By Bank A/c 55,000
By P & L A/c 5,750
By Balance c/d 1,40,750
2,15,000 2,15,000
2011
Note : Calculation of loss on sale of machine :

Initial Cost 75,000
Dep. in 2010 - 7,500
67,500
- 6,750
60,750
- 55,000
Loss on Sale 5,750
Illustration 10
On October 1, 2008, the Akash Transport Company purchased a Truck
for ` 8,00,000. On April 1, 2010, this Truck was involved in an accident
and was completely destroyed and ` 6,00,000 were received from
Insurance Company in full settlement. On the same date another Truck
was purchased by the company for ` 10,00,000. The company writes off
20% depreciation p. a. on written down value method. Give the Truck
Account from 2008 to 2010.
ACCOUNTANCY 201
and Reserves Solution
Dr. Truck Account Cr.
2008 2008
Oct. 01 To Bank A/c 8,00,000 Dec. 31 By Depreciation A/c 40,000
Notes
20 3
8,00,000
100 12
Dec. 31 By Balance c/d 7,60,000
8,00,000 8,00,000
2009 2009
Jan. 01 To Balance b/d 7,60,000 Dec. 31 By Depreciation A/c 1,52,000
20
7,60,000
100
7,60,000 7,60,000
2010 2010
Jan. 01 Balance b/d 6,08,000 Apr. 01 By Bank A/c 6,00,000
Apr. 01 To P & L A/c 22,400 Apr. 01 By Depreciation A/c 30,400
20 3
6,08,000
100 12
Apr. 01 To Bank A/c 10,00,000 Dec. 31 By Depreciation A/c 1,50,000
20 9
1,00,000
100 12
16,30,400 16,30,400
Distinction between Straight Line Method and Diminishing Balance Method

Basis Straight Line Method Diminishing Balance Method
Basis of Depreciation is calculated Depreciation is calculated on
Calculation on original cost of the asset. original cost in first year and
on written down value of the
asset in subsequent years.
Amount of The amount of depreciation The amount of depreciation
Depreciation remains the same for all years. goes on reducing year after year.
Value of The book value of the asset The book value of the asset can
Asset can be reduced to zero. never be reduced to zero.
202 ACCOUNTANCY
Depreciation The combined cost on account The combined cost on account and Reserves
and Repairs of depreciation and repairs is of depreciation and repairs
lower in the initial years and remains, more or less, equal
higher in the later years. throughout the period.
Notes
I. State which of the following statements are true and which are false:
i. Amount of depreciation goes on reducing year after year in
ii. The amount of depreciation remains the same for all years in
iii. The book value of the asset can be reduced to zero in Straight
Line Method.
iv. The book value of the asset can never be reduced to zero in
i. Depreciation is charged on :
a) Stock of Goods b) Current Assets
c) Fixed Assets d) Liquid Assets
ii. Obsolescence term is used for :
a) Tear and wear of the Assets
b) Decrease in the value of the assets which are engaged in
production
c) Development of improved or superior quality of equipment.
d) Due to usage and age of assets
iii. Changing depreciation on Fixed Assets by Straight line method.
The value of the asset is taken into consideration:
a) Original value b) Diminished value
c) Scrap value d) Book value
iv. Charging depreciation on Fixed assets by Reducing balance
method, the value of the asset is taken into consideration.
a) Original cost method b) Diminished value
c) Scrap value d) Book value
v. The amount calculated for charging depreciation :
a) Includes the amount of scrap value of the Asset
b) Do not include the amount of scrap value of the asset
c) Cost of assets less scrap value
ACCOUNTANCY 203
and Reserves vi. Out of the following which is not the cause of depreciations:
a) Normal wear and tear b) Obsolescence
c) Cost of asset. d) Decrease or increase in market price
vii. Out of the following what will before annual depreciations :
a) Total Depreciation + Plus installation charges cost
Notes b) Total lost Scrap value Expected life
c) Total cost + Scrap value Expected life
viii. Which one of the following is not a factor affecting annual
depreciation on an asset.
a) Cost of the Asset b) Scrap Value of the asset
c) Useful life of the asset d) Annual maintenance on the asset.
ix. Out of the following on which asset depreciation will be charged :
a) Stock b) Debtors c) Machinery d) Land
x. Out of the following assets on which depreciation will not be
charged:
a) Machinery b) Plant c) Photo Copier d) Stock

Depreciation is the gradual and permanent decrease in the value of an asset due
to defluxion of time, wear and tear, obsolescence or any other reason.
Causes of Depreciation
Physical Wear and Tear due to usage
Physical wear and tear due to passage of time
Obsolescence due to advancement in technology
Objective of Depreciation
To show the True Financial Position of the business.
To retain funds in the business for replacement of the Asset.
Methods of Charging Depreciation
Straight Line Method
Diminishing Balance Method
Merits of Straight Line Method
Simplicity
Assets can be Completely Written Off
Demerits of Straight Line Method
Difficulty in Computation
Illogical
204 ACCOUNTANCY
Merits of Diminishing Balance Method and Reserves
Equal burden on Profit & Loss Account.
Balance of Asset is never written Off to Zero
Demerits of Diminishing Balance Method
Asset can not be completely written off
Complexity Notes
TERMINAL EXERCISE
1. What is depreciation? Write the various objectives of providing depreciation.
2. What are the causes of providing depreciation?
3. What are the two methods of providing depreciation? Explain their
merits and demerits.
4. What are the objectives of providing depreciation?
5. Distinguish between Straight Line Method and Diminishing Balance
Method of Depreciation.
6. Krishnamohan Limited purchased a machinery on October1, 2008 for
` 90,000 and spent ` 10,000 on its erection. The depreciation is to be
charged @ 10% p. a. on original cost. Show the Machinery Account
for three years if books are closed on March 31 every year.
7. On April 1, 2008 Asahi Limited purchased a machinery for ` 80,000
and spent ` 20,000 on its repairs and installation. On September 30,
2011, the machinery was sold for ` 60,000. Prepare Machinery Account
for the year 2008 to 2011, if depreciation is charged @ 10% p. a. by
8. Ajay Kumar and Company purchased machinery for ` 20,000 on April
1, 2007. The Machinery is depreciated at 10% per annum on the straight
line method. On October 1, 2010, the machinery was sold for ` 8,000.
Give the Machinery Account if books are closed on March 31 every year.
9. A Plant is purchased for ` 80,000 on January 1, 2008. It is estimated
that the residual value of the plant at the end of its working life of 10
years will be ` 27,894. Depreciation is to be provided at 10% p.a. on
diminishing balance method.
You are required to show the Plant Account for 4 years assuming that
the books are closed on March 31 every year.
10. On January 1, 1987 Machinery Account showed a balance of ` 10,000.
On 1st July, 19888, a new machine costing `. 6,000 was purchased. On
30th June, 1990, Machinery other than the machine bought on 1st July,
1988, was disposed of for ` 6,000.
ACCOUNTANCY 205
and Reserves Show the Machinery Account for four years. The accounting year ends on
31st December, and depreciation is to be provided at 10% p.a. on written
down value.
Notes
12.1 i) Diminution ii) Amount, life iii) Life of assets iv) Technology
12.2 i) Same
ii) Fixed in statement method, Original cost method
iii) Zero, Net Scrap value iv) More
12.3 i) Falls ii) Machinery iii) Original cost
iv) Opening balance of the year v) Zero
12.4 I. i) False ii) Falseiii) True iv) True
II. i) c ii) c iii) a iv) b v) c
vi) d vii) b viii) d ix) c x) d
ACTIVITY FOR YOU
Ask your parents about the date of various fixed assets purchased by them
like T.V., Fridge, Motorcycle, Car etc., with its useful life and then calculate
the amount of depreciation to be charged on each asset.
206 ACCOUNTANCY
MODULE - IV
13
and Reserves
PROVISIONS AND RESERVES Notes
You know that businessmen prepare their accounts on the basis of going concern
concept assuming that their business will continue for an indefinite period. Hence,
in order to ascertain the net profit for each year, businessmen need to take into
account not only the current contingencies but future contingencies also. In fact,
provisions and reserves are such considerations which actually relate to the future
needs for which a part of the current earnings has to be set aside.
OBJECTIVES
After studying this lesson you will be able to
understand the meaning and need of provision;
understand the meaning of reserves;
explain types of reserves and
know the difference between provisions and reserves.
13.1 PROVISION : MEANING AND NEED
As you know in our daily routine life we make various arrangements for the future
expected needs. For example, if your father wants to give you higher education such
as Engineering, Doctorate, or any other professional course, he will need a lot of
money. Now question arises how would your father be able to arrange such an
amount? Yes, you are thinking right, he will start saving money from today and every
year he will do the same. The events which are about to happen in the future are
planned in the present with the help of available resources. In the same way these
things are followed in a business also. When there are certain expected losses/
expenses, these are planned to be managed in advance from the current years
profits/ surplus. The amount which is kept separately to meet such expected losses/
expenses is called a Provision.
If an amount is payable in the future and the amount is certain, it is a liability. For
example, October months rent, totaling Rs. 2,000. is payable on 31st October. The
enterprise will debit Rent Account and Credit Rent Outstanding Account as it is a
ACCOUNTANCY 207
MODULE - IV Provisions & Reserves
and Reserves definite liability. However, if the amount in respect of a liability or expected loss is
not certain, an estimated amount is set aside by debiting the Profit and Loss Account.
The amount so set aside is known as a Provision. Thus, Provision means an estimated
amount to meet an uncertain loss or expense in future. Some of the examples of
Provisions are: Provision for Doubtful Debts on Debtors, Provision for Discount on
Notes Debtors, Provision for Depreciation.
Needs of Provision
Provisions are provided for:
i) Depreciation, renewal or reduction in the value of assets.
ii) A known liability, the amount of which cannot be determined with
substantial accuracy.
iii) A disputed claim.
iv) Specific loss on realization of an asset or on payment of taxes.
v) Redeeming the liability.
vi) Writing off bad-debts/doubtful debts.
vii) Contingent liabilities.
General rules in creation of Provisions:
i) It is created by debiting the profit and loss account.
ii) It is created to meet a known liability or a specific contingency, e.g.
Provision for bad and doubtful debts and provision for depreciation etc.
iii) A provision is created irrespective of whether there is profit or loss in
the business.
iv) It is not available for distribution as dividend among shareholders.
v) A provision is made for a definite amount and, therefore, a definite
sum is set aside every year to meet the known contingency.
vi) Making of a provision is must to meet known liability or contingency.
vii) The provision is generally shown on the liability side of the balance sheet.

Fill in the blanks with suitable words:
i. Provision means an estimated amount to meet an uncertain __________
or ________ in future.
ii. A provision may be provided for a __________ claim.
iii. A provision is created by debiting __________ account.
iv. A provision is not available for distributions as dividend among
_________.
v. A provision in generally shown on _________ side of the balance sheet.
208 ACCOUNTANCY
Provisions & Reserves MODULE - IV
13.2 MEANING OF RESERVE and Reserves
Our future is uncertain. There are a lot of contingencies, various needs and requirements
in the future. Sometime we estimate for some unexpected losses/ expenses we may
have to bear in the future. For this, we save some money from our current earning.
If the unexpected event happens, we can use this saved money. Suppose your father
Notes
earns Rs.20,000 in a month and he does not set some money aside for any type of
unexpected happening. In the mid of the month you get ill then how will your father
manage for the various medical expenses for your treatment. Definitely, he will have
to ask for money from friends, relatives etc. If they do not help your father, then
think what will happen?
If your father had kept some money for these kinds of unexpected happenings, he
would not have to face such types of troubles. Thus, an amount which is kept aside
from our current income to meet the unexpected happening in the future is the reserve.
Future is uncertain, in the business there are a lot of happenings which may happen
unexpectedly. For this arrangement of funds in a well planned manner is necessary.
Some amount of total earned fund in a year is needed to set aside as a reserve.
Reserves are the amounts set aside out of profits. It is an appropriation of
profits or accumulated profits to strengthen the financial position of the business.
It is not a charge against profits. Reserves are not meant to cover any liability
or depreciation in the value of assets. Examples are General Reserves, Reserves
for Expansion, Reserve for Equalization of Dividends, Reserve for Increased
Costs of Replacement, etc.
13.3 TYPES OF RESERVES
Sometimes business, likely or certainly, has to anticipate some known or
unknown future contingencies/emergencies. To meet this, business set aside a
part of the profits and other surpluses which is called a reserve. Reserve is an
appropriation of the profits and not a charge to it because it is not supposed to
meet any known liability or diminution in the value of an asset. It is that part of
profits that is kept aside to meet an unknown liability or for future emergency.
It is created by debiting the P&L Appropriation A/c. It can be created only
when there is profit in the business. It is usually shown on the liability side of
the balance sheet. Reserves can be categorized into:
i. General Reserve ii. Capital Reserve iii. Secret Reserve
iv. Revenue Reserve v. Specific Reserve vi. Reserve Fund
vii. Sinking Fund
ACCOUNTANCY 209
and Reserves i) General reserve: As the name suggests, the general reserve is not tied
down to any specific purpose. It can be utilised to meet any future contingency
or unknown liability. It is not legally mandatory to create a general reserve.
It is created only when there is sufficient profit. It is shown on the debit side
of P&L Appropriation A/c.
Notes It is created not for any specific purpose but for meeting future
contingencies.
It can be utilized for meeting any future loss.
It is created only when there are sufficient profits.
It is created only when there are profits i.e. it depends upon profits.
It is shown on the debit side of profit and loss appropriation account.
Only distributable profits are reduced because of it.
This reserve is created by setting aside revenue profits. The object is to
strengthen the general financial position of the business. It is not for a
specific purpose. It is a free reserve. It acts as a safety cushion against
all unforeseen contingencies in the future. It is immediately available
for distribution as dividend profit.
General Reserves are retained profits. They are part of the surplus. They
are the amount kept aside from profits. There can be no reserves if
there are no profits. Reserves are undistributed profits. They are
appropriations of profits. While provisions are a pre-profit matter,
reserves are a post-profit matter. One cannot talk of creating reserves,
without first finding out profits. It is a good business policy to create
reserves. Reserve strengthen the financial position of the business.
Reserves are created for different purposes. They may be for expansion
of business; they may be for equalization of dividends or they may be
for redemption of debentures or loans. Again, reserves may be created
out of capital profits or out of revenue profits. The reserves created out
of capital profits are called capital reserves, whereas, others are called
revenue reserves.
ii) Capital Reserve : A capital reserve is generally created out of profits
which are of capital nature only, such as capital gains, premium on
issue of shares and debentures, profits prior to incorporation, profits
on revaluation of assets and liabilities etc. It should not be distributed
as dividend among the shareholders. It is used to strengthen the
financial position of business, to write off capital losses or losses of
abnormal nature.
210 ACCOUNTANCY
Thus, the Capital Reserves and Reserves
Are appropriations from profits which cannot be distributed by way
of cash dividends.
Arise mainly from (i) equity transactions between the enterprise and
its shareholders; (ii) from adjustments arising in accounting for
business combinations; (iii) from differences arising on transactions Notes
of foreign currency operations; (iv) from surpluses arising from asset
revaluation; (iv) any unrealized gain which has not been included in
income.
Examples of capital reserves includes: security premium, capital
redemption reserves, capital reserves arising on merger and
acquisition of a business, statutory reserves, asset revaluation
reserve and exchange fluctuation reserves.
Capital reserves are created out of capital profits. Capital profits are not
regular trading profits. They are profits on rare transactions. Capital reserves
are generally not available for distribution as dividend. They are set aside to
strengthen the financial position of the business or to meet capital losses.
The following are the examples of capital profits :
a) Profit on sale of fixed assets.
b) Profit prior to incorporation.
c) Profit on redemption of debentures.
d) Premium on issue of shares or debentures.
e) Profit on forfeiture of shares.
f) Profit on acquisition of business.
g) Profit which have not been earned in the regular course of business.
Capital reserves can be utilized in the following ways:
a) Issue of bonus shares.
b) Writing off goodwill.
c) Writing off preliminary expenses.
d) Writing off shares/debentures issue expenses.
e) Writing off losses prior to incorporation.
iii) Secret Reserve : Sometimes, a firm creates a reserve which is not shown
in the balance sheet; it is known as secret reserve or hidden reserve or
internal reserve. The existence of this reserve is not disclosed in the financial
statements. It strengthens the financial position of the business, promotes
confidence and stability. It is not created by joint stock companies except
banking, insurance and financing companies.
iv) Revenue Reserves : Revenue Reserves are appropriation from revenue
profits which can be distributed by way of cash dividends although
ACCOUNTANCY 211
and Reserves some may be set aside for other purposes.
v) Specific Reserve : As the name suggests, the Specific Reserve is created for
a specific purpose. It is utilised for only that purpose for which it has been
created and not for purpose other than that. Whether a firm earns profit or
suffers losses, it is obligatory for it to create specific reserve. It is shown on the
Notes debit side of P&L A/c. Examples of such reserves are- dividend equalization
reserves, investment fluctuation reserves, plant replacement reserves and
reserves for redemptions of debentures.
a) It is created for a specific purpose.
b) It is utilized for that specific purpose, for which it was created.
c) Whether profit or no profits, it must be created.
d) It is necessary to create in order to ascertain profit.
e) It is shown on the debit side of profit and loss account.
f) Net profits are reduced because of it.
This too is created by setting aside revenue profits. But it is for a specific
purpose. This is not immediately available for distribution. For example,
reserve created for redemption of debentures. During the period of
liability, this reserve is not available for distribution. It becomes a general
reserve on the redemption of debentures. Similarly, a reserve may be
created for equalization of dividend.
vi) Reserve Fund : When a part of the profit set aside and used in the business,
it is a reserve. But when a part of profits and other surplus is set aside and
invested outside the business then it is known as reserve fund. In this case,
the retained amount is invested in safe securities which are readily and easily
realisable. Investments are not being carried for definite period. The purpose
is to strengthen the financial position of the business house. Thus, the use of
the term fund indicates investment of reserve outside the business. Reserve
fund Investments are not made for definite period. It is created always out
of divisible profits. Interest received on investments representing reserve
fund may not be re-invested.
Profit set aside and used in the business is a reserve. But profit set aside and
invested outside the business is a reserve fund.
a) Investments are not for definite period.
b) It is created always out of divisible profits.
c) Interest received on investments representing reserve fund may
not be re-invested.
212 ACCOUNTANCY
vii) Sinking Fund : A sinking fund is established for the future redemption of the and Reserves
long-term debts or liabilities or for replacement of assets or to renew a lease.
A sinking fund is a fund built up by annual contributions. The contributions are
invested outside the business in readily realizable securities. Interest received
on investments is reinvested in the same securities. Thus a sinking fund may be
(i) for replacement of fixed assets or (ii) for the redemption of debentures or Notes
repayment of loan. A sinking fund for the replacement of a fixed asset is a
provision. But a sinking fund for redemption of debentures or repayment of
loan is an appropriation of profits. The company does not require creating
sinking fund.
Reserves are appropriations of profit namely when profits have been
ascertained after deducting all expenses which includes provision and
others. Reserves are residual earnings after all expenses and taxation
which belongs to the owners namely the shareholders.
a) Sinking fund Investments are for a definite period.
b) It is not always out of divisible profit e.g. sinking fund for
replacement of asset is provision for depreciation, it must be
created even if there are no profits.
c) In case of sinking fund, interest is always re-invested.
A sinking fund is a fund built up by annual contributions. The contributions
are invested outside the business in readily realizable securities. Interest
received on investments is reinvested in the same securities.
A sinking fund may be (i) for replacement of fixed assets or (ii) for the
redemption of debentures or repayment of loan. A sinking fund for the
replacement of a fixed asset is a provision. But a sinking fund for
redemption of debentures or repayment of loan is an appropriation of
profits. A sinking fund represents amount invested outside the business.
General rules in creation of Reserves
i) It is created by debiting the profit and loss appropriation account.
ii) It is created to meet an unknown liability, or to strengthen the financial
position of the company or for equalization of dividends etc.
iii) A reserve is created only when there is profit in the business.
iv) It can be distributed among shareholders as dividend.
v) The reserve is created without taking into consideration the actual
amount required except in the case of redemption of debentures when
a definite sum is set aside.
vi) Creation of reserve depends upon the financial policy of the business and
discretion of its management.
ACCOUNTANCY 213
and Reserves vii) It is usually shown on the liability side of the balance sheet as it is not a
specific reserve.

Notes Fill in the blanks with suitable words :
i. An amount kept aside from current income to meet unexpected
happening in future is called ___________.
ii. It is not legally mandatory to create a ___________.
iii. ________ reserve is created out of __________ profit.
iv. Profit on sale of fixed assets is ___________ profit.
v. ________ reserve is not shown in the financial statement.
vi. Profit set aside and used in business is called a _____________.
vii. Profit set aside and invested outside the business is called ___________.
viii. Sinking Fund Investments are for a ___________ period.
13.4 DIFFERENCES BETWEEN PROVISION AND RESERVE
S. No. Provisions Reserves
1. It is created by debiting the It is created by debiting the Profit &
Profit & Loss A/c. Loss Appropriation A/c.
2. It is a charge against the profits It is an appropriation of profits and
without which true profit or loss doesnt require to be created to
of the business cant be ascertained. ascertain true profit or loss.
3. It has to be provided even if It can be created only when there is
there is loss or no profit in the profit in the business.
business. It is created irrespective
of whether there is profit or loss
in the business.
4. It cant be available to be distri- It can be distributed as dividend
buted as dividend among the among the shareholders.
shareholders.
5. It is a sum for known liability or It is a sum to meet an unknown future
for specific contingency e.g.pro- liability or contingency or to
vision for bad and doubtful debts, strengthen the financial position of
or provision for depreciation etc. the business or for equalization of
dividends etc.
214 ACCOUNTANCY
6. Making of a provision is a It is not legally obligatory to create a and Reserves
legal necessity for the reserve. It depends upon the financial
management. policy of the business and discretion
of its management.
7. Provision can be on a liability Reserves belong to the owners equity
Notes
side or on the assets side but as side. So, It is usually shown on the
a negative asset. In general, liability side of the balance sheet as
these are shown on the liability it is not a specific reserve.
side of the balance sheet.
8. It is an amount written off It does not include any amount written
or retained by way of providing off or retained by way of providing
for depreciation, renewal, dimi- for depreciation, renewal,
nution in the asset value or for diminution in the asset value or for
any known liability, the amount any known liability, the amount of
of which cannot be accurately which cannot be accurately
ascertained. ascertained.
9. Amount cant be utilized for Amount can be utilized for any
purposes other than that for purpose because they represent
which they are created. undistributed profits.
10. Purpose is to meet out a specific Purpose is to strengthen the financial
loss on realization of an asset position of the business.
or for payment of taxes etc.
11. It is set aside for meeting out an It increases working capital of the
anticipated loss or liability. business.
12. Amount cant be determined Amount depends upon financial
with substantial accuracy though policy and discretion of management.
liability is known.
13. Provision is a known diminution Reserves are surpluses not yet
in value of an asset or a known distributed and, in some cases (e.g.,
liability. share premium account or capital
redemption reserve), not distributable.
14. A provision is made for a definite The reserve is created without taking
amount and, therefore, a definite into consideration the actual amount
sum is set aside every year to meet required, except in the case of
the known contingency. redemption of debentures when a
definite sum is set aside.
ACCOUNTANCY 215
and Reserves

I. State whether the following statements are True or False :
i. Provisions are the charges against profits for all apprehended
Notes losses.
ii. All reserves appear on the liability side of the balance sheet.
iii. Capital reserves are freely distributed as profits.
iv. The purpose of reserve is generally to strength the financial
position of a business enterprise.
v. A provision is made for a definite amount and therefore, a
definite sum is set aside every year the meet the know
contingency.
II. Multiple Choice Questions:
i. Out of the following which is not a provision:
a) Provision for bad debts.
b) Provision for discount on debtors.
c) Dividend Equalization Reserve.
d) Provision for Depreciation.
ii. Out of the following which is not a reserve:
a) Reserve for Expansion.
b) Dividend Equalization Reserve
c) Secret Reserve
d) Provision for bad debts.
iii. Out of the following name the reserve which is created not for
any specific purpose but for meeting future contingencies:
a) General Reserve b) Capital Reserve
c) Specific Reserve d) Secret Reserve
iv. Out of the following name the reserve which can be utilised for issue
of bonus shares:
a) General Reserve b) Capital Reserve
c) Secret Reserve d) Sinking Fund
v. Out of the following identify the item which is created by debiting
the profit and loss appropriations Account:
a) Provision for bad debts
b) Provision for discount on debtors
c) Provision for Income tax
d) General Reserve
216 ACCOUNTANCY
and Reserves
Provision is an estimated amount to meet an uncertain loss or expense of
future e.g., Provision for Doubtful Debts on Debtors, Provision for Discount
on Debtors, Provision for Depreciation, etc. Provisions are created out of Notes
profits and are generally shown on the liability side of the balance sheet.
Making a provision is must to meet a known liability in future.
An amount which is kept aside from current income to meet the unexpected
happening in the future is called a reserve e.g. General Reserve, reserve for
expansion, reserve for equalization of dividend etc. General Reserve is
undistributed or retained profits. No reserve can be created if there is no
profit. Reserves strengthen the financial positions of the business. Capital
reserves are created out of capital profits eg. Capital gains, premiums on
issue os shares and debentures, profits prior to incorporation etc. These
reserves are not available for distribution of dividend. Secret reserve is not
shown in the balance sheet. Revenue reserves are appropriations of profits
which can be distributed as dividends. Specific reserve is created for a
specific purpose e.g. dividend equalization reserve, investment reserve,
investment fluctuation reserve etc. When a part of the profit is set aside and
invested outside the business then it is known as a reserve fund. A Sinking
fund is established for the future redemption of long term debts or liability or
replacement of assets etc.
TERMINAL EXERCISE
1. What is meant by Reserve Fund?
2. What is meant by a provision?
3. Give the meaning of reserves.
4. State the purposes for which provision are created?
5. Why an organisation creates reserves? Explain briefly.
6. State the purposes for which capital reserves can be utilized.
7. Distinguish between provision and reserve (any four points).
8. Describe briefly the following:
i. Secret Reserves
ii. Revenue Reserves
iii. Specific Reserves
iv. Sinking Fund
ACCOUNTANCY 217
and Reserves
13.1 i) Loss/expense ii) Disputed iii) Profit and Loss
iv) Owner/Shareholder v) Liability
Notes 13.2 i) Reserve ii) General Reserve iii) Capital, Capital
iv) Capital v) Secret vi) Reserve
vii) Reserve Fund viii) Definite
13.3 I. i) True ii) True iii) False iv) True v) True
II. i) c ii) d iii) a iv) b v) d
ACTIVITY FOR YOU
Your parents from their regular income make some savings for the known or
unknown expenses/liability to meet out in future. Prepare a list of past three
months savings with reasons and differentiate them in reserves or provisions
keeping in view the principles of the same, so that you may be clear about
the term reserve & provisions.
218 ACCOUNTANCY
Notes
MODULE - V
20 48
Preparation of Financial Statements

This module will enable the learners to understand the meaning and need for
preparing financial statements which are the final outcome of the accounting
practice. They will learn the steps of the preparation of Income statement and
Balance Sheet. The learners will also learn to adjust the different items of
adjustment which are provided in the form of additional information
(adjustment).
Lesson 14 : Financial Statements (Without Adjustments)

Lesson 15 : Financial Statements (With Adjustments)
ACCOUNTANCY 219

Several projects have been implemented by the NIOS to tap the potential of Information and
Communication Technology (ICT) for promoting of Open and Distance Learning (ODL) system.
The Ni-On project of NIOS won the National Award for e-governance and Department of Information
and Technology, Govt. of India. In further recognition of its On-line initiatives and best ICT practices,
the NIOS received the following awards:
NIOS WINS National Award for e-Governance 2008-09

Silver icon for Excellence in Government Process Re-engineering, Instituted
by Government of India Department of Administrative Reforms and Public
Grievances & Department of Information Technology.
NIOS receives NCPEDP MPHASIS Universal Design Awards 2012

National Institute of Open Schooling (NIOS) has been awarded
THE NCPEDP - MPHASIS UNIVERSAL DESIGN AWARDS
2012 instituted by National Centre for Promotion of Employment
for Disabled People. The award was given by Sh. Mukul
Wasnik, Honble Minister for Social Justice and
Empowerment, Govt. of India on 14th August, 2012. NIOS
has been selected for its remarkable work done for the learners
with disabilities through ICT by making its web portal
www.nios.ac.in completely accessible for such learners.
The Manthan Award South Asia & Asia Pacific 2012

The Manthan Award South Asia & Asia Pacific 2012 to recognize
the best ICT practices in e-Content and Creativity instituted by
Digital Empowerment Foundation in partnership with World
Summit Award, Department of Information Technology, Govt. of
India, and various other stakeholders like civil society members,
media and other similar organisations engaged in promoting digital
content inclusiveness in the whole of South Asian & Asia Pacific
nation states for development. The award was conferred during
9th Manthan Award Gala South Asia & Asia Pacific 2012 at India Habitat Centre on 1st Dec.
2012.
MODULE - V
Preparation of
14
Financial Statements
FINANCIAL STATEMENTS Notes

(WITHOUT ADJUSTMENTS)
In the previous lessons you have learnt to record the business transactions in different
books of accounts and their posting into the main book i.e. ledger. You have also
learnt the balancing of accounts and preparation of trial balance. One of the important
purposes of accounting is to find out the profit or loss of a business for a particular
accounting period and also to know its financial position on a particular date.
For this purpose, Income Statement and Position Statement are prepared every
year by all business organisations. Income statement is divided into two parts,
which are as follows:
(i) Trading Account and
(ii) Profit and Loss Account.
Income Statement is prepared to know the earnings of a business during a
particular accounting year or the loss suffered during the year. Position
Statement, also known as Balance Sheet, is prepared to know the financial
position of a business on a particular date.
In this lesson you will learn as to how the financial statements are prepared to
find out the profit for an accounting year and to know its financial position on
a particular date.
OBJECTIVES
explain the meaning of financial statements;
explain the objectives of financial statements;
classify the financial statements into Trading Account, Profit and
Loss Account and Balance Sheet and
prepare Trading Account, Profit and Loss Account and Balance
Sheet.
ACCOUNTANCY 221
MODULE - V Financial Statements (Without Adjustment)
Preparation of
Financial Statements 14.1 MEANING OF FINANCIAL STATEMENTS
Like a student who eagerly waits for his/her annual examination result, every
businessman also eagerly waits to know the result of his business for a particular
financial year. The businessman also wants to know the financial position of
his business on a particular date. This date is normally the last date of the
Notes
financial year for which the accounts have been prepared. The statements,
prepared to know the result of the business and the financial position of the
business, are called financial statements. The statement prepared for ascertain
gross profit/loss is called Trading Account. The statement prepared to ascertain
the net profit is called Profit and Loss Account. Trading and Profit and Loss
Account taken together is called the Income Statement. Statement prepared to
know the financial position of the business is called the Balance Sheet or
Position Statement.
14.2 OBJECTIVES OF FINANCIAL STATEMENTS
Following are the objectives of preparing financial statements:
i) Ascertain the result of business activities : One of the important
objectives of preparing financial statements is to ascertain the Income.
Financial statements provide information about the profit earned or loss
incurred during a particular accounting period or year.
ii) Ascertain the financial position of business : Balance Sheet provides
information about the financial position of business on a particular date.
iii) Correct decision making : Financial statements are helpful in decision
making for the business on the basis of the information provided by financial
statements, future decisions can be taken correctly.
iv) Judging the performance of management : Financial statements are
helpful in judging the performance of management and utilization of
resources of a business house.
v) Ascertaining the cash position of business : The cash position indicated
by the financial statements helps the business in planning the payment of
cash to creditors, suppliers etc.
14.3 CLASSIFICATION OF FINANCIAL STATEMENTS
Financial Statements of a sole trader comprise of the following statements:
I. Income Statement
(i) Trading Account and
(ii) Profit and loss Account
II. Position Statement or Balance Sheet
222 ACCOUNTANCY
Financial Statements (Without Adjustment) MODULE - V
Preparation of
Income Statement Financial Statements
Income statement is prepared to find out the profit or loss of business for a particular
accounting year. Income statement is made up of the following accounts:
a) Trading Account and
b) Profit and loss Account
a) Trading Account : Trading Account is prepared to find out the Gross profit Notes
earned or Gross loss suffered by the business from business activities during
an accounting year. This account is prepared in T-form. Following is the
proforma of a Trading Account:
Trading Account of M/s XYZ
Dr. for the year ending.......... Cr.
Particulars Amount Particulars Amount
(`) (`)
To Opening Stock _______ By Sales
To Purchases (i) Cash Sales _______
(i) Cash Purchases _______ (ii) Credit Sales _______
(ii) Credit Purchases _______ Total Sales _______
Total Purchases _______ Less Sales Returns _______
Less Purchase Returns _______ Net Sales _______
Net Purchases _______ By Closing Stock _______
Direct Expenses : By Gross Loss transferred to
To Wages _______ P & L A/c (Balancing fig.) _______
To Freight/Freight Inward _______
To Carriage/Carriage Inward _______
To Fuel & Power _______
To Factory Rent _______ _______
To Gross Profit transferred to
P & L A/c (Balancing fig.)
_______ _______
Illustration 1
From the following balances extracted from the books of M/s Luxmi & Sons, prepare
a Trading Account for the year ended 31st March, 2012.
Particulars Amount (`)
Opening stock 6,500
Purchases 45,000
Sales 72,000
Purchases Returns 500
Sales Returns 1,500
Carriage 1,200
Wages 4,800
Fuel & Power 3,200
Closing stock 8,000
ACCOUNTANCY 223
Preparation of
Financial Statements Solution
Trading Account of M/s Luxmi & Sons
Dr. for the year ended March 31, 2012 Cr.
(`) (`)
Notes To Opening Stock 6,500 By Sales 72,000
To Purchases 45,000 Less : Returns 1,500 70,500
Less : Returns 500 44,500 By Closing Stock 8,000
To Carriage 1,200
To Wages 4,800
To Fuel & Power 3,200
To Gross Profit
transferred to P & L A/c
(Balancing Figure) 18,300
78,500 78,500
Illustration 2
From the following balances extracted from the books of M/s Bhanu Bros, prepare
a Trading Account for the year ended 31st March, 2012.
Particulars Amount
(`)
Opening Stock as on 1.4.2011 32,000
Purchases 1,65,000
Freight 4,000
Power 6,500
Custom Duty 5,500
Sales 80,000
Closing Stock as on 31st March, 2012 30,000
Solution
Trading Account of M/s Bhanu Bros.
(`) (`)
To Opening Stock 32,000 By Sales 80,000
To Purchases 1,65,000 By Closing Stock 30,000
To Freight 4,000 By Gross Loss
To Power 6,500 transferred to P & L A/c
To Custom Duty 5,500 (Balancing Figure) 1,03,000
2,13,000 2,13,000
224 ACCOUNTANCY
Preparation of
i. Carriage is debited to ____________ account.
ii. Total Sales Sales Returns = ____________ Notes
iii. Wages are debited to ____________ account.
iv. Closing stock is shown on the ____________ side of Trading Account.
v. Total Purchases Purchase Returns = ____________
b) Profit and Loss Account : After finding out the gross profit/ gross loss by
preparing the Trading Account, Profit and Loss Account is prepared to find
out the net profit / net loss of the business during an accounting year. This
account is also prepared in T-form. Following is the proforma of a Profit
and loss Account
Profit and loss Account of M/s ABC
Dr. for the year ended_________ Cr.
Particulars ` Particulars `
To Gross Loss transferred By Gross profit transferred
from Trading A/c ______ from Trading A/c ______
To Salaries ______ By Commission Received ______
To Office Rent ______ By Discount received
To Printing & Stationery ______ from creditors ______
To Insurance Premium ______ By Rent Received ______
To Interest Paid ______ By Interest Received ______
To Freight outwards ______ By Net Loss Transferred to
To carriage outwards ______ Capital Account
To Discount Allowed to customers ______ (Balancing Figure) ______
To Postage ______
To Telephone Charges ______
To Office Expenses ______
To Sales Expenses ______
To Net Profit Transferred to
Capital Account (Balancing Figure) ______
______ ______
Illustration 3
From the following information, prepare Profit and loss Account of M/s Sahil Bros
for the Year ending on 31.03.2012.
`
Gross Profit 97,000
Discount allowed to customers 2,000
Printing and stationery 2,000
Office rent 5,000
ACCOUNTANCY 225
Preparation of
Financial Statements Repair 2,400
Insurance Premium 5,100
Telephone Charges 1,000
Discount received from Creditors 3,000
Interest earned during the year 5,000
Notes Solution
Profit and loss Account of M/s Sahil Bros.
To Discount allowed to customers 2,000 By Gross profit transferred
To Printing and Stationery 2,000 from Trading A/c 97,000
To Office Rent 5,000 By Discount received from
To Repairs 2,400 creditors 3,000
To Insurance Premium 5,100 By Interest earned during the year 5,000
To Telephone Charges 1,000
To Net Profit transferred to Capital
Capital A/c (Balancing fig.) 87,500
1,05,000 1,05,000
Illustration 4
From the following information, prepare Profit & Loss Account of M/s Sarthak
Traders for the year ending on 31.03.2012
`
Gross Profit 43,000
Discount allowed to customers 7,000
Salaries 45,000
Interest paid on loan 13,000
Postage 2,400
Discount received from creditors 6,000
Commission received 1,000
Sales expenses 10,000
Solution
Profit and loss Account of M/s Sarthak Traders
To Discount allowed to customers 7,000 By Gross profit transferred
To Salaries 45,000 from Trading A/c 43,000
To Interest on loan 13,000 By Discount received from
To Postage 2,400 Creditors 6,000
To Sales expenses 10,000 By Commission Received 1,000
By Net Loss transferred to capital A/c 27,400
77,400 77,400
226 ACCOUNTANCY
Preparation of
State whether the following statements are True or False:
i. Carriage inward is shown in Profit& Loss Account.
ii. Telephone expenses are shown in Trading Account. Notes
iii. Carriage outward is shown in P&L A/c.
iv. Gross Profit is transferred from Profit & Loss Account to Trading Account.
Distinction between Trading Account and Profit and Loss Account
The distinction between Trading A/c and Profit & Loss A/c is as follows:
S.No. Trading Account Profit and Loss Account
This account shows the gross This account shows the net profit or
1. profit or gross loss for an net loss for an accounting year.
accounting year.
All direct expenses relating to All indirect expenses relating to
2. business are shown on the business are shown on the debit side
debit side of this account. of this account.
All direct revenue items are All indirect revenue items are shown
3. shown on the credit side of on the credit side of this account.
this account.
The balance of this account i.e. The balance of this account i.e. net
4. gross profit or gross loss is profit or net loss is transferred to the
transferred to P&L. A/c. capital account of the proprietor .
II. Position Statement or Balance Sheet
Balance Sheet or Position Statement is prepared to find out the financial position of
a business on a particular date. Generally it is prepared on the last date of an
accounting year. It is prepared after preparing Trading Account and Profit &
Loss Account.
Balance Sheet has two sides. Left hand side is known as Liabilities side and
right hand side is known as Assets side.
The Liabilities side is used for showing liabilities of the business. The term
liabilities include Internal Liabilities and External Liabilities of the business. Internal
liabilities means the amount payable by the business to its owner, while external
liabilities mean the amount payable to outsiders.
ACCOUNTANCY 227
Preparation of
Financial Statements Classification of Internal and External Liabilities
Internal liabilities External liabilities
a. Capital Creditors
b. Profits of business Bank loan and other loans
Notes c. Reserves of business Expenses payable or due
The Assets side is used for showing the assets of the business. The term assets
includes fixed assets and current assets of the business.
Classification of Assets
Fixed Assets Current Assets
a. Land and building Cash in hand
b. Plant &Machinery Cash at Bank
c. Furniture Stock of goods
d. Motor Vehicles etc. Debtors etc.
Objectives of Preparing Balance Sheet
Balance sheet is prepared to achieve following objectives:
i) To know the financial position of the business.
ii) To know the position of internal liabilities and external liabilities of
the business so that timely arrangement can be made for their payment.
iii) To know the position of fixed assets and current assets.
iv) To plan activities for future on the basis of present financial position.
Proforma of Balance Sheet
Balance Sheet of M/s ______________
as on _________________
Liabilities ` Assets `
Bank overdraft _______ Cash in hand _______
Creditors _______ Cash at Bank _______
Loans/Bank Loan _______ Debtors _______
Capital _______ Stock _______
Add : Net Profit _______ Investments _______
Less : Net Loss _______ Furniture _______
Less Drawings _______ _______ Motor Vehicles _______
Plant & Machinery _______
Land & Building _______
_______ _______
228 ACCOUNTANCY
Preparation of
Illustration 5 Financial Statements
From the following information supplied by Mr. Roshan Lal, prepare a Balance
Sheet of Mr. Roshan Lal as on 31st March, 2012
`
Capital 50,000
Furniture 15,000 Notes
Debtors 25,000
Creditors 30,000
Plant and Machinery 58,000
Investments 5,000
Cash in hand 1,000
Cash at Bank 1,000
Stock at the end 10,000
Bank Overdraft 8,000
Bank Loan 20,000
Net Profit 10,000
Drawings 3,000
Solution
Balance Sheet of Mr. Roshan Lal
Dr. as on March 31, 2012 Cr.
Bank overdraft 8,000 Cash in hand 1,000
Creditors 30,000 Cash at Bank 1,000
Bank Loan 20,000 Debtors 25,000
Capital 50,000 Stock 10,000
Add : Net Profit 10,000 Investments 5,000
60,000 Furniture 15,000
Less Drawings - 3,000 57,000 Plant & Machinery 58,000
1,15,000 1,15,000
Illustration 6
From the following information supplied by Mr. Arun Kumar, prepare a Balance
Sheet as on 31st March, 2012.
`
Creditors 30,000
Debtors 35,000
Cash in hand 24,500
Cash at Bank 27,500
Stock 22,500
Furniture 25,000
ACCOUNTANCY 229
Preparation of
Financial Statements Loan 50,000
Plant & Machinery 32,500
Land & Building 52,000
Capital 1,37,000
Net Profit 12,000
Notes Drawings 10,000
Solution
Balance Sheet of Mr. Arun Kumar
Dr. as on March 31, 2012 Cr.
Creditors 30,000 Cash in hand 24,500
Loan 50,000 Cash at Bank 27,500
Capital 1,37,000 Debtors 35,000
Add : Net Profit 12,000 Stock 22,500
1,49,000 Furniture 25,000
Less : Drawings 10,000 1,39,000 Plant & Machinery 32,500
Land & Building 52,000
2,19,000 2,19,000

I. Fill in the Blanks :
i. Assets are shown on the _________ side of the Balance Sheet.
ii. Capital is shown on the liabilities side of _________ .
iii. Total of Assets side and liabilities side of balance sheet are always
_________.
iv. Stock is an example of ___________ asset.
v. Furniture is an example of ___________ asset.
II. Classify the following assets as fixed assets and current assets:
Assets Type of Asset (Fixed or Current)
i. Debtors
ii. Land & Building
iii. Plant & Machinery
iv. Cash at Bank
v. Motor Vehicle
vi. Cash in hand
230 ACCOUNTANCY
Preparation of
Illustration 7 Financial Statements
From the following Balances of M/s Pawan Sales on 31/3/2012, prepare a Trading
and Profit & Loss Account and a Balance Sheet as on that date.
Notes
(`) (`)
Drawings 8,000 Sales 2,58,000
Capital 48,000 Return Inwards 2,000
Sundry Creditors 80,000 Return Outwards 2,200
Sundry Debtors 1,26,000 Office Salaries 18,000
Bills Receivable 10,000 Manufacturing Wages 8,000
Opening stock 90,000 Commission 9,000
Fixtures and Fittings 13,000 Trade Expenses 5,000
Cash in hand 2,000 Rent 4,400
Machinery 24,800 Discount received 8,000
Bank Overdraft 10,000 Bills Payable 14,000
Purchases 1,00,000
The closing stock on 31.3.2012 was ` 1,04,000
Solution
Trading and Profit and Loss A/c M/s Pawan
(`) (`)
To Opening Stock 90,000 By Sales 2,58,000
To Purchases 1,00,000 Less : Returns 2,000 2,56,000
Less : Returns 2,200 97,800 By Closing Stock 1,04,000
To Manufacturing Wages 8,000
To Gross Profit c/f 1,64,200
3,60,000 3,60,000
To Office Expenses 18,000 By Gross Profit b/f 1,64,200
To Commission 9,000 By Discount received 8,000
To Trade Expenses 5,000
To Rent 4,400
To Net Profit c/f 1,35,800
1,72,200 1,72,200
Balance Sheet
as on March 31, 2012
Bills Payables 14,000 Cash in hand 2,000
Sundry Creditors 80,000 Bills Receivable 10,000
Bank Overdraft 10,000 Sundry Debtors 1,26,000
ACCOUNTANCY 231
Preparation of
Financial Statements Capital 48,000 Stock 1,04,000
Less : Drawings 8,000 Fixtures and Fittings 13,000
40,000
Add : Net Profit 1,35,800 1,75,800
2,79,800 2,79,800
Notes

I. Mention whether following statements are True or False :
i. A Balance Sheet shows the financial position of a business
for the whole year.
ii. Both P & L Account and Balance Sheet are position statements.
iii. Asset side of a balance sheet shows only the fixed assets of a
business.
iv. Liabilities side of a Balance Sheet shows both internal and external
liabilities.
II. Multiple Type Questions
i. Which of the following financial statement is prepared to ascertain
gross profit of a business?
a) Profit and Loss Account b) Trading Account
c) Balance Sheet d) None of the above
ii. Which of the following financial statements is prepared to
ascertain the positions of assets and liabilities of the business?
a) Balance Sheet b) Profit and Loss Account
c) Trading Account d) None of the above
iii. Gross profit is the difference between
a) Total assets and total liabilities
b) Sales and all expenses
c) Sales and indirect expenses
d) Sales and cost of goods solds
iv. Which of the following is not an indirect expense?
a) Freight inward b) Discount allowed
c) Rent paid d) Commission paid
v. Which of the following is a current asset?
a) Land b) Building
c) Cash at bank d) Machinery
232 ACCOUNTANCY
Preparation of

Financial Statements are prepared to ascertain the Gross Profit and Net
profit earned by a business enterprise during a period and the positions
of its assets and liabilities on a particular date, generally on the last date of Notes
the accounting year.
Trading account is prepared to ascertain gross profit earned or gross loss
suffered during a period and profit and loss account is prepared to ascertain
the net profit earned or net loss suffered by the business during a period.
Trading and profit and loss account taken together is called income statement.
Balance sheet is prepared to know the position of assets and liabilities of the
business on a particular date. This is called the position statement.
Financial statements are prepared to know the result of business activities,
to know the financial position of the business, to help in decision making, to
judge the performance of the management, to know the cash position of the
business etc.
TERMINAL EXERCISE
1. What do you mean by term financial statements?
2. State the objectives of preparing financial statements.
3. State the objectives of preparing Balance Sheet.
4. Distinguish between direct expenses and indirect expenses.
5. Distinguish between Trading Account and Profit and Loss Account.
6. Give five examples each of fixed assets and current assets.
7. Give three examples each of internal liabilities and external liabilities.
8. From the following balances prepare trading account for the year ended
31st March 2012
Opening Stock 6,000 Purchases 11,500
Purchase return 500 Sales 48,000
Sales return 600 Freight & Octori 500
Carriage on purchases 1,000 Wages 2,500
Factory lighting 600 Import duty 900
Office rent 1,200 Carriage on sales 3,000
Coal, gas & water 800
ACCOUNTANCY 233
Preparation of
Financial Statements 9. Prepare Profit and Loss account for the year ended 31st March 2012 from
the following particulars.
General Expenses 800 Gross Profit 32,100
Charity 100 Carriage on sales 900
Notes Electricity charges 175 Office expenses 650
Law charges 180 Insurance premium 1,200
Advertisement 440 Telephone expenses 600
Commission 870 Sales tax 800
Rent 1,800 Establishment expenses 700
Interest on investment 700 Miscellaneous expenses 750
Sundry receipts 700 Discount received 1,090
Indirect expenses 340 Traveller salary 300
Printing and stationary 65 Repair 270
10. From the following trial balance of Gopal Nath and Sons, prepare Trading
and Profit and Loss Account for the year ending 31st December 2012 and a
Balance Sheet as at that date:
Opening Stock 4,000 Bills Payable 1,200
Purchases 12,000 Purchase return 300
Carriage 1,170 Sundry creditors 2,700
Wages 1,000 Sales 20,000
Sales return 200 Capital 30,000
Drawings 1,500 Commission received 120
Office expenses 250
Salaries 1,600
Discount 300
Repairs 1,200
Advertisements 500
Sundry debtors 6,000
Building 10,000
Cash in hand 600
Cash at bank 2,000
54,320 54,320
The value of stock in hand on 31st December 2012 was ` 6,000.
234 ACCOUNTANCY
Preparation of
14.1 (i) Trading Account (ii) Net Sales (iii) Trading Account
(iv) Credit Side (v) Net Purchases
Notes
14.2 (i) False (ii) False (iii) True (iv) False
14.3 I. (i) Right hand side (ii) Balance Sheet (iii) Equal
(iv) Current (v) Fixed
II. (i) Current (ii) Fixed (iii) Fixed
(iv) Current (v) Fixed (vi) Current
14.4 I. (i) False (ii) False (iii) False (iv) True
II. (i) b (ii) a (iii) d (iv) a (v) c

8. Gross Profit Rs. 24,100
9. Net Profit Rs. 24,450.
10. Gross Profit Rs. 7,930; Net Profit Rs. 4,200; Total of Balance Sheet Rs.
36,600.
ACTIVITY FOR YOU
Visit a small business organisation in a nearby area, request them to show
you their final accounts, with the help of an accountant learn the technique of
preparing the final accounts.
ACCOUNTANCY 235
MODULE - V
Preparation of
15
Notes
FINANCIAL STATEMENTS
(WITH ADJUSTMENTS)
You have learnt in the previous lesson, how to prepare Trading A/c, Profit & Loss
A/c and Balance Sheet.
These financial statements are prepared with the help of a given Trial Balance. It is
possible that the expenses given in the Trial Balance may not be the total expenses
for that accounting year for which trial balance has been prepared.
Similarly a portion or part of the expenses given in the Trial Balance may relate to
future year(s).
If Financial Statements are prepared with the help of such a Trial balance, they will
not present a correct picture of the business. The income statement will not show
correct net profit or net loss. Similarly the Balance sheet will not show the correct
financial picture of the business.
So, before preparing the financial statement, it is necessary to find out the items of
expenses which relate to the current year but have not been paid.
Similarly it is necessary to find out the items of expenses which relate to future year
but have been paid or received during current year.
Therefore, it becomes necessary to make some adjustments in respect of some
items of expense and income. These are called accounting adjustments.
OBJECTIVES
After studying this lesson you will able to :
understand the need for accounting adjustments;
understand the adjustments relating to closing stock, outstanding expenses,
prepaid expenses and depreciation on fixed assets;
explain adjustment entries relating to above adjustments and
understand the accounting treatment of the adjustments in Trading A/c, Profit
and Loss A/c and Balance Sheet.
236 ACCOUNTANCY
Financial Statements (With Adjustments) MODULE - V
Preparation of
15.1 NEED FOR ACCOUNTING ADJUSTMENTS Financial Statements
Accounting adjustments are required because of the following purposes:

i) To know the correct net profit or net loss of the business for an
accounting year.
ii) To know the correct financial position of the business.
Notes
iii) To record the expenses which have become due but have not been paid
iv) To record the expenses which have been paid in advance for future
year(s)
v) To provide for depreciation on fixed assets.
15.2 TYPES OF ADJUSTMENTS
The number and nature of adjustments will differ from business to business. You will
study the following common adjustments in this lesson :
i) Closing Stock
ii) Outstanding Expenses
iii) Prepaid Expenses
iv) Depreciation on Fixed assets
Let us discuss the above items of adjustments and their accounting treatment
in the financial statements.
i) Closing Stock
Closing stock is the stock of goods which remains unsold at the end of the accounting
year. This item is, normally, not shown inside the Trial balance. It appears outside the
trial balance as additional information. For example the books of Mr. X showed the
value of closing stock as on 31.3.2012 `30,000.
The accounting treatment of closing stock in the financial statements of Mr. X., will
be as follows:
(a) The following adjustment entry will be passed at the end of the year:
31.3.2012 Closing Stock A/c Dr. 30,000
To Trading A/c 30,000
(For Closing stock transferred to
Trading A/c)
(b) Trading A/c of Mr. X for the year ending 31.3.2012
Dr. Cr.
(`) (`)
By Closing Stock 30,000
ACCOUNTANCY 237
MODULE - V Financial Statements (With Adjustments)
Preparation of
Financial Statements (c) Balance Sheet of Mr. X as on 31.3.2012
Liabilities Amount Assets Amount
(`) (`)
Closing Stock 30,000
Notes Note : If Closing stock is given inside the Trial balance, the above mentioned
adjustment entry will not be passed and the closing stock will not be shown
on the credit side of Trading A/c. The closing stock will be shown on the
assets side of Balance Sheet only.
ii) Outstanding Expenses
An expense which relates to the current year but has not been paid till the end of the
accounting year is known as outstanding expenses such as Factory rent, Wages,
Salaries, Office rent, Telephone charges etc. for current year may not have been
paid till the end of the accounting year, for example the books of accounts of Mr. X
showed that, Wages paid during the year 2011-2012 ` 45,000. Wages outstanding
for the year 2011-2012 ` 5,000.
The accounting treatment of wages outstanding in the books of Mr.X will be as
follows:
(a) The adjustment entry will be:
31.3.2012 Wages A/c Dr. 5,000
Wages outstanding A/c 5,000
(For wages outstanding for the
year 2011-12)
(b) Trading A/c of Mr. X
for the year ending 31.3.2012
Dr. Cr.
(`) (`)
Wages : 45,000
(+) Wages O/S : 5,000 50,000
(c) Balance Sheet of Mr. X
as on 31-3-2012
(`) (`)
Wages Outstanding 5,000
238 ACCOUNTANCY
Preparation of
Let us take another example, regarding outstanding salary which affects the net Financial Statements
profit.
Example: The books of accounts of Mr.X showed the following:
Salaries for the year 2011-12 already paid during the year ` 1,00,000. Salaries for
2011-12 due but not paid till 31-3-12 ` 10,000. Its accounting treatment in the Notes
books of Mr.X will be as follows.
(a) Adjustment entry will be as under:
31.3.2012 Salaries A/c Dr. 10,000
To Salaries outstanding A/c 10,000
(For salary outstanding for the
year 2011-12)
(b) Profit & Loss A/c for Mr.X
For the year ending 31-3-2012
(`) (`)
To Salaries : 1,00,000
(+) Salaries O/S : 10,000 1,10,000
(c) Balance Sheet

as on 31-3-2012
(`) (`)
SalariesOutstanding 10,000

Give exact term for your answer :
i. Stock remains unsold at the end of year.
ii. Amount not paid for the good or services whose benefits was already availed.
iii. Value of unsold goods shown outside the trial balance as additional
information.
iv. Transaction shown outside the trial balance to be incorporated before
the preparation final accounts.
iii) Prepaid Expenses
Sometimes, a part of the expenses given in the trial balance may relate to future
year(s). Such part of expenses is known as Prepaid Expenses or Expense paid in
ACCOUNTANCY 239
Preparation of
Financial Statements Advance such as, out of the salaries paid during the current year, a part may relate
to next accounting year. Similarly factory rent, wages, office rent, insurance premium,
taxes, etc. may be prepaid in some cases. For example the books of accounts of
Mr.X showed the following:
Total salaries paid during the accounting year 2011-2012 ` 2,00,000 out of which `
Notes 25,000 relates to the next accounting year, i.e, 2012-13. The accounting treatment,
of prepaid salaries in the books of Mr. X will be as follows:
(a) Adjustment entry for prepaid salaries will be as under:
31.3.2012 Prepaid Salaries A/c Dr. 25,000
To Salaries A/c 25,000
(For salaries paid in advance
for next year 2012-13)
(b) Profit & Loss A/c for Mr.X

for the year ending31-3-2012
(`) (`)
To Salaries : 2,00,000
(-)Prepaid Salaries : 25,000 1,75,000
(c) Balance Sheet of Mr.X
as on 31-3-2012
(`) (`)
Prepaid Salaries 25,000
iv) Depreciation on Fixed Assets

The value of fixed assets such as Plant and Machinery, Building, Furniture, Computers,
Motor Vehicles, etc. goes on decreasing or reducing every year due to their use,
wear and tear. This decrease in the value of assets is called depreciation.
Depreciation is an expense like any other expense of the business.
Depreciation on various fixed assets is shown on the debit side of P&L A/c.
The amount of depreciation on fixed asset is deducted from the concerned or related
asset on the asset side of Balance Sheet. For example the books of accounts of Mr.
X showed the following:
240 ACCOUNTANCY
Preparation of
The value of Plant and Machinery is ` 5,00,000 as on 31-3-2012 and value of Financial Statements
Furniture is ` 50,000 as on 31-3-2012. Depreciation is to be charged on these
assets @10% p.a. The accounting treatment of depreciation in the financial statements
of Mr. X, will be as follows :
(a) Entry for charging depreciation will be as under:
Notes
31-3-2012 Depreciation A/c Dr. 55,000
To Plant&Machinery A/c 50,000
To Furniture A/c 5,000
(For depreciation charged on
Plant and Machinery and Furniture
@10% for one year)
(b) Profit & Loss A/c for Mr. X

Dr. for the year ending 31-3-2012 Cr.
(`) (`)
To Depreciation on
Furniture 5,000
(c) Balance Sheet of Mr.X

as on 31-3-2012
(`) (`)
Plant & Machinery 5,00,000
(-) Dep. 50,000 4,50,000
Furniture 50,000
(-) Dep. 5,000 45,000

Match column A with column B
A B
i. Closing Stock (a) Deducted from the value of assets
ii. Outstanding Expenses (b) Those expenses which have not became
due but have been paid during the
accounting year in question.
iii. Depreciation (c) Those expenses which have became due
but have not been paid in the concerned
accounting year.
iv. Prepaid expenses (d) Shown an the credit side of Trading A/c.
ACCOUNTANCY 241
Preparation of
Financial Statements Illustration 1
From the following trial balance of M/s Kaushal Traders, prepare Trading and Profit
and Loss Account for the year ended 31st March 2012 and a Balance Sheet as on
that date :
Dr. Balances ` Cr. Balances `
Notes
Opening stock on 1st April, 2011 16,000 Capital 80,000
Purchases 75,000 Sales 2,00,000
Sales returns 5,000 Purchases returns 2,000
Carriage inwards 1,500 Discount 500
Plant and Machinery 40,000 Sundry creditors 10,000
Furniture and fixtures 5,000 Bills payable 1,500
Freehold property 45,650
Cash in hand 5,000
Carriage outwards 400
Wages 30,000
Salaries 18,000
Lighting (factory) 800
Sundry debtors 28,000
Travelling expenses 1,200
Rent and taxes 4,800
Drawings 5,000
Insurance 450
General expenses 12,200
2,94,000 2,94,000
Adjustments :
i. Stock on 31st March 2012 was valued at ` 38,000 (market value ` 20,000).
ii. Wages amounting to ` 2,000 and salaries amounting to ` 1,500 are outstanding.
iii. Prepaid insurance amounted to ` 150.
iv. Provide depreciation on plant and machinery at 5% and on furniture
and fixtures at 10%.
Solution
Trading and Profit and Loss Account
Dr. for the year ending 31st March, 2012 Cr.
` `
To Opening stock 16,000 By Sales 2,00,000
To Purchases 75,000 Less : Sales returns 5,000 1,95,000
Less : Purchases returns 2,000 73,000 By Closing stock 20,0001
To Carriage inwards 1,500
To Wages 30,000
Add : Outstanding wages 2,000 32,000
To Factory lighting 800
To Gross profit c/d 91,700
2,15,000 2,15,000
242 ACCOUNTANCY
Preparation of
To Carriage outwards 400 By Gross profit b/d 91,700 Financial Statements
To Salaries 18,000 By Discount 500
Add : Outstanding salaries 1,500 19,500
To Travelling expenses 1,200
To Rent and taxes 4,800
To Insurances 450
Less : Prepaid insurance 150 300 Notes
To General expenses 12,200
To Depreciation on :
Pland and machinery 2,000
Furniture and fixtures 500 2,500
To Net profit transferred
to Capital A/c 51,300
92,200 92,200
Balance Sheet
as on 31st March 2012
` `
Bills payable 1,500 Cash in hand 5,000
Sundry creditors 10,000 Sundry debtors 28,000
Outstanding wages 2,000 Closing stock 20,0001
Outstanding salaries 1,500 Prepaid insurance 150
Capital 80,000 Furnitures and fixtures 5,000
Add : Net profit 51,300 Less : Depreciation 500 4,500
1,31,000 Plant and machinery 40,000
Less : Drawings 5,000 1,26,300 Less : Depreciation 2,000 38,000
Freehold property 45,650
1,41,300 1,41,300
Note : (1) Closing stock is valued at cost price or market price whichever is less.
Illustration 2
From the following trial Balance of M/s. Gupta Furnitures as on 31st December,
2012 you are required to prepare a Trading and Profit & Loss A/c for the year
ended 31st Dec. 2012 and a Balance Sheet as at that date after making the
necessary adjustments. Trial Balance of M/s. Gupta Furniture as at 31.12.2012.
Particulars Dr (`) Cr. (`)
Capital A/c of Mr. Gupta 80,000
Cash in hand 540
Cash in bank 2,630
Purchase A/c 43,120
Sales A/c 78,100
Wages A/c 10,480
Fuel and Power A/c 4,730
ACCOUNTANCY 243
Preparation of
Financial Statements Carriage on Sales A/c 3,200
Carriage on Purchase A/c 2,040
Stock (on 1-1-2012) 5,760
Land & Building A/c 40,000
Machinery A/c 20,000
Notes Salaries A/c 15,000
Insurance A/c 600
Sundry Debtors A/c 20,000
Sundry Creditors A/c 10,000
1,68,100 1,68,100
Taking into consideration the following adjustments, make necessary journal entries
and prepare final accounts.
i. Stock on hand 31.12.2012 is ` 5,000
ii. Machinery is to be depreciated @ 10% p.a.
iii. Salaries for the month of December outstanding amounted to ` 3,500.
iv. Insurance prepaid for 3 months.
Solution
2012 Adjusting Entries (`) (`)
Dec. 31 Closing stock A/c Dr. 5,000
(For closing stock taken into account)
Dec. 31 Depreciation A/c Dr. 2,000
To Machinery 2,000
(For depreciation charged on machinery @ 10%)
Dec. 31 Salaries A/c Dr. 3,500
To Salaries Outstanding 3,500
(For outstanding salaries provided for)
Dec. 31 Prepaid Insurance A/c Dr. 150
To Insurance A/c 150
(For prepaid insurance taken into account)
Trading Account of M/s. Gupta Furnitures
for the year ended on 31st Dec. 2012
Dr. Cr.
(`) (`)
To Stock (1.1.12) 5,760 By Sales 78,100
To Purchases 43,120 By Stock (31.12.12) 5,000
244 ACCOUNTANCY
Preparation of
To Wages 10,480 Financial Statements
To Fuel and Power 4,730
To Carriage on Purchase 2,040
To Gross Profit transferred
to Profit & Loss A/c 16,970
83,100 83,100 Notes
Profit and Loss A/c

for the year ended on 31st December, 2012
Particulars Amount Particulars Amounts
(`) (`)
To Carriage on Sales 3,200 By Gross Profit b/d 16,970
To Salaries 15,000 By Net Loss transferred to
Add : Outstanding 3,500 18,500 capital A/c of Mr. Gupta 7,180
To Insurance 600
Less : Prepaid 150 450
To Depreciation on Machinery 2,000
24,150 24,150
Balance Sheet of M/s. Gupta Furnishers

as on 31st December, 2012
(`) (`)
Sundry Creditors 10,000 Cash in hand 540
Outstanding Salaries 3,500 Cash at bank 2,630
Capital A/c of Mr. Gupta 80,000 Sundry Debtors 20,000
Less : Net Loss 7,180 72,820 Closing Stock 5,000
Prepaid Insurance 150
Land and Building 40,000
Machinery A/c 20,000
Less : Depreciation 2,000 18,000
86,320 86,320
ACCOUNTANCY 245
Preparation of

I. Mention whether the following statements are True or False
i. Financial statements prepared without considering adjustments
Notes do not reflect the correct financial positions of the business.
ii. The accounting treatment of adjustments is done only in
Balance Sheet.
iii. The Accounting treatment of adjustment entry is done only in
Trading Account or Profit & Loss Account.
iv. Adjustments are always related to future.
II. Fill in the blanks
i. Closing stock is shown on the ................ side of Balance sheet.
ii. Outstanding Expenses are shown on the .............. side of Balance
Sheet.
iii. Prepaid expenses are shown on the ................ side of Balance sheet.
iv. Depreciation is shown on the................. side of profit and loss A/c.
v. Closing stock is shown on the asset side of...............
vi. The decrease in the value of fixed asset due to their use is called..........
vii. Adjustments are made to know the correct.................of a business.
viii. Outstanding wages shown on the................. of the ...............
ix. Outstanding office Rent will be shown on the................side
of...........and ................ side of Balance sheet.
x. Profit and Loss A/c is prepared to know ..................of an accounting
year.
III. Multiple Choice Questions
i. When no adjustment is done for outstanding wages. Gross profit
ascertained will be
a) more than the actual b) less than the actual
c) equal to the actual d) will not be affected
ii. Prepaid expenses are expenses
a) paid in advance b) outstanding expenses
c) expenses incurred for the current year
d) expenses paid for the previous year
iii. Depreciation is debited to
a) Trading account b) profit and loss account
c) concerned asset account d) none of the above
246 ACCOUNTANCY
Preparation of
iv. An item of adjustment is shown Financial Statements
a) only in trading account
b) only in profit and loss account
c) only in balance sheet
d) in trading account or P&L A/c and also in Balance Sheet
Notes

Necessary adjustments are required at the time of preparation of financial
statements in order to ascertain the correct profit and financial position
of the business.
Closing stock is the stock of goods which remains unsold at the end of an
accounting year. Adjustment is done in Trading Account and Balance Sheet.
Outstanding Expenses refer to the expenses relating to current year but which
have not been paid during the current year. Adjustments is done in Trading
Account, Profit and Loss Account and Balance Sheet.
Prepaid Expenses or expense paid in advance refer to those expenses which
relate to future year. Adjustments is done in trading account, profit & loss
account and balance sheet.
Depreciation on fixed Assets refers to Decrease in the value of fixed assets
due to their use, wear and tear. Adjustment is done in profit and loss account
and balance sheet.
TERMINAL EXERCISE
1. What is meant by an adjustment entry?
2. Why is it necessary to pass adjusting entries in financial statements?
3. Write short notes on :-
a) Outstanding Expenses b) Prepaid Expenses
4. Explain the following adjustments and their treatment in the financial
statements : a) Closing Stock b) Depreciation
5. From the following trial balance of M/s Sakshi Garments. Prepare
Trading & Profit and Loss Account for the year ending 31st March 2012
and Balance Sheet as on that date.
Particulars Dr. (`) Particulars Cr. (`)
Stock (1.4.2011) 13,800 Capital 65,000
Purchases 52,000 Sales 74,400
Wages 4,000 Purchase return 1,500
ACCOUNTANCY 247
Preparation of
Financial Statements Sales Returns 2,400 Discount 450
Land & Building 40,000 Creditors 6,500
Plant & Machinery 24,500 Interest 600
Debtors 5,250 Commission 700
Cash in hand & bank 8,750 Bank Loan 26,000
Notes Office Rent 2,200
Postage 400
Insurance 1,500
Freight 1,400
Fuel & Power 2,450
Furniture 4,500
Motor Car 12,000
1,75,150 1,75,150
Adjustments
i. Stock on 31.3.2012 ` 25,000
ii. Write off depreciation on furniture 10% and on Plant & Machinery 20%
iii. Wages outstanding amounted to ` 650 and rent outstanding was
`200. Pre-paid insurance amounted to ` 300.
6. From the following particulars for the year ending 31.3.2012 of M/s Pant.
Bros. prepare Trading Account, Profit & Loss Account and a Balance Sheet
as on 31.3.2012
Particulars Dr. (`) Particulars Cr. (`)
Capital 4,00,000 Salaries 1,20,000
Opening Stock 85,000 Rent & Taxes 40,000
Purchases 4,20,000 Postage & Telegrams 25,000
Creditors 75,000 Interest Paid 20,000
Debtors 1,20,000 Furniture 2,00,000
Sales 8,10,000 Insurance 1,00,000
Discount received 18,000 Freight 20,000
Discount allowed 16,000 Cash in hand 50,000
Purchases Returns 20,000 Cash at bank 47,000
Sales Returns 10,000 Motor car 50,000
Adjustments
1. Closing stock valued as on 31.3.2012 ` 1,70,000
2. Salaries outstanding ` 12,000
3. Charge depreciation on Motor Car @ 10% P.A.
248 ACCOUNTANCY
Preparation of
7. From the following information of M/s Bhanumati Traders you are required Financial Statements
to prepare Trading Account, Profit & Loss Account and Balance Sheet as
on 31st March 2012.
Particulars (`) Particulars (`)
Capital 2,00,000 Stock on 1-4-11 62,000
Drawings 10,000 Purchases 1,40,000 Notes
Plant & Machinery 1,00,000 Sales 2,30,000
Salaries 14,000 Purchases Returns 2,600
Printing & Stationery 2,000 Sales Returns 4,200
Discount Allowed 1,500 Freight 1,200
Debtors 25,000 Cash in hand 32,000
Creditors 40,000 Cash at bank 50,000
Insurance 3,000 Land & Building 50,000
Postage 600
Office Rent 2,600
Adjustments
Outstanding wages as on 31 March 2012 - ` 2,500
Outstanding Salaries ` 700
Prepaid Insurance ` 400
Closing stock ` 44,000
8. From the following information received from the books of Mr. Sahil
on 31.3.2012, you are required to prepare the Trading Account & Profit
& Loss Account for the year ending 31.3.2012 and a Balance Sheet as
on 31.3.2012
Particulars (`) Particulars (`)
Opening Stock 37,000 Capital 1,62,000
Purchases 93,500 Drawings 1,60,000
Wages 28,000 Discount received 1,600
Sales 2,49,000 Sundry Creditors 43,000
Salaries 11,000 Loan 30,000
Rent 5,500 Cash in hand 37,300
Interest Paid 2,700 Cash at bank 37,300
Discount Allowed 2,400 Debtors 86,000
Postage & Telegram 2,000 Furniture 21,400
Printing & Stationery 1,800 Motor Car 20,000
Sales Expenses 2,200 Building 60,000
Insurance Premium 5,500 Plant & Machinery 16,000
ACCOUNTANCY 249
Preparation of
Financial Statements Adjustments
i. Closing stock was valued at ` 30,000
ii. Depreciate
(a) Building by 5% p.a.
(b) Furniture 10% p.a.
Notes (c) Land & Building 15% p.a.
(d) Motor Car 20% p.a.
iii. Rent outstanding `1,500
iv. Prepaid Insurance ` 300

15.1 (i) closing stock(ii) outstanding expenses
(iii) closing stock (iv) adjustments
15.2 (i) d (ii) c (iii) a (iv) b
15.3 I. (i) True (ii) False (iii) False (iv) False
II. (i) asset(ii) Liability (iii) Asset (iv) Debit
(v) Balance Sheet (vi) Depreciation
(vii) Financial position (viii) Liability side, Balance Sheet
(ix) Debit side Trading A/c, Liability
(x) Profit or Losses
III. (i) a (ii) a (iii) a (iv) d
ACTIVITY FOR YOU
Assuming that your father is a businessmen, running a small shop as a sole
proprietor and maintains the accounts of the business of his own. As a student
of Accountancy one day you came to know that no adjustment entry was
done by your father while preparing final accounts of his business. You are
required to reprepare the final accounts by passing necessary adjustment entries
in your father business books of account.
250 ACCOUNTANCY
Notes
MODULE - VI
9 18
Computer in Accounting
This module will enable the learners to understand the meaning and characteristics
of a computer with its components and limitations. It also emphasises on use of
computers in Accouning. It will also make you to learn the difference between manual
accounting and computerised accounting. One should be able to know the basic
requirements of computerised accouning. Once you are able to know the use and
importance of computers in accouning you must understand the meaning, features
and importants steps for starting Tally ERP 9.0, together with how to create a company
in Tally.
Lesson 16 : Computers in Accounting

Lesson 17 : Introduction to Tally
ACCOUNTANCY 251

Web Ratna Awards 2012 Platinum Icon under
Outstanding Web Content for Acknowledging exemplary
initiatives/practices in the realm of e-Governance for dissemination of
information & services instituted by Department of Information
Technology, Ministry of Communications & IT (MC&IT) and National
Informatic Centre (NIC), Government of India. The award has been
conferred by Honble Minister of Communications and Information
Technology Shri Kapil Sibal on 10th December 2012 at Dr. D.S Kothari
Auditorium, DRDO Bhawan, Dalhousie Road, New Delhi.
TOI Social Impact Award 2012

NIOS has been selected as
winner of the Social Impact
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of India in partnership with J P
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work done by an individual or
groups or institutions making an
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high level dignitaries.
National Awards for the Empowerment of Persons with Disabilities, 2012

The NIOS received the National Award for the
Empowerment of persons with disabilities, 2012
Instituted by Ministry Social Justice and Empowerment,
Govt. of India. The NIOS got this award under the
category of best accessible Website for making its
website www.nios.ac.in completely accessible for
person with disabilities. The website is bilingual in Hindi
and English. It also has provisions of Screen Reader,
increasing text size, colour contrast scheme etc. for
disabled learners. This award was conferred by the
Honble President of India at Vigyan Bhawan, New Delhi on 6th February, 2013. Dr. S.S. Jena
Chairman, NIOS received the award.
MODULE - VI
Computer in
16
Accounting
COMPUTERS IN ACCOUNTING Notes
With the expansion of business, the number of transactions have increased and as a
result the manual method of keeping and maintaining records has become
unmanageable. With the introduction of computers in business, the manual
method of accounting is being gradually replaced. The database technology
has revolutionized the accounts department of the business enterprises. In this
lesson, we will study about the features of a computer, role of computers in
accounting, need of computerized accounting, etc.
OBJECTIVES
state the meaning and characteristics of a computer;
describe the components of a computer;
explain the limitations of a computer;
explain the role of computers in accounting;
differentiate between manual accounting and computerized accounting;
state the need for computerized accounting and
describe the basic requirements of computerized accounting.
16.1 COMPUTER AND ITS CHARACTERISTICS
Computer is an electronic device that can perform a variety of operations in
accordance with a set of instructions called programme. It is a fast data
processing electronic machine. It can provide solutions to all complicated
situations. It accepts data from the user, converts the data into information and
gives the desired result. Therefore, we may define computer as a device that
transforms data into information. Data can be anything like marks obtained in
various subjects. It can also be name, age, sex, weight, height, etc. of all the
students, savings, investments, etc., of a country. Computer is defined in terms
of its functions. Computer is a device that accepts data, stores data, processes
data as desired, retrieves the stored data as and when required and prints the
result in desired format.
ACCOUNTANCY 253
MODULE - VI Computers in Accounting
Computer in
Accounting Characteristics of Computer
A computer is better than human being in various aspects and it possesses some
characteristics, which are as follows:
i) Speed : It can access and process data millions times faster than humans
can. It can store data and information in its memory, process them and
Notes produce the desired results. It is used essentially as a data processor.
All the computer operations are caused by electrical pulses and travels
at the speed of light. Most of the modern computers are capable of
performing 100 million calculations per second.
ii) Storage : Computers have very large storage capacity. They have the
capability of storing vast amount of data or information. Computers
have huge capacity to store data in a very small physical space. Apart
from storing information, todays computers are also capable of storing
pictures and sound in digital form.
iii) Accuracy : The accuracy of computer is very high and every calculation is
performed with the same accuracy. Errors occur because of human beings
rather than technological weakness; main sources of errors are wrong program
by the user or inaccurate data.
iv) Diligence : A computer is free from tiredness and lack of concentration.
Even if it has to do 10 million calculations, it will do even the last one
with the same accuracy and speed as the first.
v) Versatility : Computer can perform wide range of jobs with speed, accuracy,
and diligence. In any organization, often it is the same computer that is used
for diverse purposes such as accounting, playing games, preparing electric
bills, sending e-mails and so on.
vi) Communication : Computers are being used as powerful communication
tools. All the computers within an office are connected by cable and it is
possible to communicate with others in the office through the network of
computers.
vii) Processing Power : Computer has come a long way today. They began as
mere prototypes at research laboratories and went on to help the business
enterprises, and today, their reach is so extensive that they are used almost
everywhere. In the course of this evolution, they have become faster, smaller,
cheaper, more reliable and user friendly.
16.2 COMPONENTS OF A COMPUTER
A computer consists of three major components i.e., Input Unit, central Processing
Unit and Output Unit. Diagrammatically, these components may be presented as
follows:
254 ACCOUNTANCY
Computers in Accounting MODULE - VI
Computer in
Computer Components Accounting
Input Unit Central Porcessing Unit (CPU) Output Unit

Notes
Control Unit Memory Unit Arithmetic Logic Unit (ALU)
Input Unit
Input unit is controlling the various input devices which are used for entering data
into the computer. The mostly used input devices are keyboard, mouse and scanner.
Other such devices are magnetic tape, magnetic disk, light pen, bar code reader,
smart card reader, etc. Besides, there are other devices which respond to voice and
physical touch for e.g. Physical touch system is installed at airport for obtaining the
online information about departure and arrival of flight. The input unit is responsible
for taking input and converting it into binary system.
Central Processing Unit (CPU)
The CPU is the control centre for a computer. It guides, directs and governs its
performance. It is the brain of the computer. The main unit inside the computer
is the Central Processing Unit. This is used to store program, photos, graphics,
and data and obey the instructions in program. It is divided into three sub
units: i) Control Unit ii) Memory Unit and iii) Arithmetic Logic Unit (ALU).
i) Control Unit : Control Unit controls and co-ordinates the activities of all
the components of the computer.
ii) Memory Unit : This unit stores data before being actually processed. The
data so stored is accessed and processed according to instruction which
are also stored in the memory section of computer well before such data is
transmitted to the memory from input devices.
iii) Arithmetic and Logic Unit : It is responsible for performing all the
arithmetical calculations and computations such as addition, subtraction,
division and multiplication. It also performs logical functions involving
comparisons among variable and data items.
Output Unit
After processing the data, it ensures the convertibility of output into human readable
form that is understandable by the user. The commonly used output devices include
monitor, plotter, printer, speaker, etc.
ACCOUNTANCY 255
Computer in
Accounting

Fill in the blanks with correct word/words
i. Computer is a fast data __________ electronic machine.
Notes ii. All the computer operations are caused by _________ pulses and travels
at the speed of light.
iii. A computer is free from __________ and lack of concentration.
iv. Computers are being used as powerful __________ tools.
v. The mostly used input devices are keyboard, __________ and scanner.
vi. Central Processing Unit is to computer, as the __________ is to human
body
vii. The commonly used output devices include __________ printer etc.
16.3 LIMITATIONS OF A COMPUTER
The limitations of computer are due to the operating environment they work
in. These limitations are given as below :
i) High Cost of Installation : Computer hardware and software need to be
updated from time to time with availability of new versions. As a result heavy
cost is incurred to purchase a new hardware and software every time there
is a change in the existing version.
ii) High Cost of Training : To ensure efficient use of computers in accounting,
new versions of hardware and software are introduced. This requires training
and cost is incurred to train the personnel.
iii) Self Decision Making Not Possible : The computer cannot make a
decision like human beings. It is to be guided by the user, and work
only the way it is programmed to function.
iv) Costly Maintenance : Computers require to be maintained properly to
help maintain its efficiency. It requires a neat, clean and controlled
temperature to work efficiently which results into costly maintenance.
v) Dangers for Health : Extensive use of computer may lead to many health
problems such as muscular pain, eyestrain, and backache, etc. This affects
adversely the working efficiency and increasing medical expenditure.
16.4 APPLICATIONS OF COMPUTER IN ACCOUNTING
The most popular system of recording of accounting transaction is manual
which requires maintaining books of accounts such as Journal, Cash Book,
Special purpose books, Ledger and so on. The accountant is required to prepare
summary of transactions and financial statements manually. The advance
technology involves various machines capable of performing different
256 ACCOUNTANCY
Computer in
accounting functions, for example, a billing machine known as computer. This machine Accounting
is capable of computing discount, adding net total and posting the requisite data to
the relevant accounts.
With substantial increase in the number of transactions, a machine was developed
which could store and process accounting data in no time. Such advancement leads
into the growth of successful enterprises. A newer version of machine is evolved Notes
with increased speed, storage, and processing capacity. A computer to which these
were connected operated these machines. As a result, the maintenance of accounting
records become more convenient with the computerized accounting.
The computerized accounting uses the concept of databases. For this purpose an
accounting software is used to implement a computerized accounting system. It does
away the necessity to create and maintain journals, ledgers, etc., which are essential
part of manual accounting. Some of the commonly used accounting softwares are
Tally, Cash Manager, Best Books, Busy, etc.
Accounting software is used to implement computerized accounting. The computerized
accounting is based on the concept of database. It is basic software which allowed
access to the data contained in the data base. It is a system to manage collection of data
ensuring at the same time that it remains reliable and confidential.
Following are the applications of computers in accounting:
i) Preparation of accounting documents : Computer helps in preparing
accounting documents like Cash memo, Bills, and Invoices etc., and
preparing accounting vouchers.
ii) Recording of transactions : Everyday business transactions are recorded
with the help of computer software. Logical scheme is implied for
codification of accounts and transaction. Every account and transaction
is assigned a unique code which put that account in a particular group.
This process simplifies the work of recording the transactions.
iii) Preparation of Trial Balance and Financial Statements : After recording
of transaction, the data is transferred into ledger accounts automatically by
the computer. Trial balance is prepared by the computer to check accuracy
of the records. With the help of the trial balance the computer can be
programmed to prepare Trading and Profit and Loss Account and Balance
Sheet.
16.5 COMPUTERIZED ACCOUNTING
Transaction processing system (TPS) is the first stage of computerized accounting
system. The purpose of any TPS is to record, process, validate and store transaction
that occur in various functional areas of a business for subsequent retrieval and
ACCOUNTANCY 257
Computer in
Accounting usage. TPS involves following steps in processing a transaction: Data Entry, Data
Validation, Processing and Revalidation, Storage, Information and Reporting. It is
one of the transaction processing systems which is concerned with financial
transactions only. When a system contains only human resources it is called manual
system; when it uses only computer resources, it is called computerized system and
Notes when it uses both human and computer resources, it is called computer-based system.
These steps can be explained with an example making use of automatic Teller Machine
(ATM) facility by a Bank-customer.
i) Data Entry : Processing presumes data entry. A bank customer operates
an ATM facility to make a withdrawal. The actions taken by the customer
constitute data which is processed after validation by the computerized
personal banking system.
ii) Data Validation : It ensures the accuracy and reliability of input data by
comparing the same with some predefined standards or known data. This
validation is made by the Error Detection and Error Correction procedures.
The control mechanism, wherein actual input data is compared with
predetermined norms is meant to detect errors while error correction
procedures make suggestions for entering correct data input. The Personal
Identification Number (PIN) of the customer is validated with the known
data. If it is incorrect, a suggestion is made to indicate the PIN is invalid.
Once the PIN is validated, the amount of withdrawal being made is also
checked to ensure that it does not exceed a pre-specified limit of withdrawal.
iii) Processing and Revalidation : The processing of data occurs almost
instantaneously in case of Online Transaction Processing (OLTP)
provided a valid data has been fed to the system. This is called check
input validity. Revalidation occurs to ensure that the transaction in terms
of delivery of money by ATM has been duly completed. This is called
check output validity.
iv) Storage : Processed actions, as described above, result into financial
transaction data i.e. withdrawal of money by a particular customer, are
stored in transaction database of computerized personal banking system.
This makes it absolutely clear that only valid transactions are stored in
the database.
v) Information : The stored data is processed making use of the Query facility
to produce desired information.
vi) Reporting : Reports can be prepared on the basis of the required information
content according to the decision usefulness of the report.
258 ACCOUNTANCY
Computer in
Accounting

Fill in the blanks with correct word/words:
1. Computer hardware and __________ need to be updated from time to time.
2. The __________ cannot make a decision itself like human beings. Notes
3. _______ requires a neat, clean and controlled temperature to work efficiently.
4. The most popular system of recording of accounting transactions is _______.
5. The computerized accounting uses the concept of __________.
6. Accounting ________ is used to implement a computerized accounting.
16.6 NEED AND REQUIREMENTS OF COMPUTERIZED
ACCOUNTING
The need for computerized accounting arises from advantages of speed,
accuracy and lower cost of handling the business transactions. These have
been explained below:
i) Numerous transactions : The computerized accounting system is capable
of handling large number of transactions with speed and accuracy.
ii) Instant reporting : The computerized accounting system is capable of
offering quick and quality reporting because of its speed and accuracy.
iii) Reduction in paper work : A manual accounting system requires large
physical storage space to keep accounting records/books and vouchers/
documents. The requirements of stationary and books of accounts along
with vouchers and documents is directly dependent on the volume of
transactions beyond a certain point. There is a need to reduce the paper
work and dispense with large volume of books of accounts. This can
be achieved by introducing computerized accounting system.
iv) Flexible reporting : The reporting is flexible in computerized accounting
system as compared to manual accounting system. The reports of a manual
accounting system reveal balances of accounts on periodic basis while
computerized accounting system is capable of generating reports of any
balance as and when required and for any duration which is within the
accounting period.
v) On-line facility : Computerized accounting system offers online facility to
store and process transaction data so as to retrieve information to generate
and view financial reports.
vi) Scalability : Computerized accounting systems are fully equipped with
handling the growing transactions of a fast growing business enterprise.
The requirement of additional manpower in Accounts department is
ACCOUNTANCY 259
Computer in
Accounting restricted to only the data operators for storing additional vouchers. There
is absolutely no additional cost of processing additional transaction data.
vii) Accuracy : The information content of reports generated by the computerized
accounting system is accurate and therefore quite reliable for decision making.
In a manual accounting system the reports and information are likely to be
Notes distorted, inaccurate and therefore cannot be relied upon. It is so because
by many people, especially when the number of transactions to be processed
to produce such information and report is quite large.
viii) Security : Under manual accounting system it is very difficult to secure such
information because it is open to inspection by any one dealing with the
books of accounts. However, in computerized accounting system only the
authorized users are permitted to have access to accounting data. Security
provided by the computerized accounting system is far superior compared
to any security offered by the manual accounting system.
16.7 BASIC REQUIREMENTS OF THE COMPUTERIZED
ACCOUNTING SYSTEM
The basic requirements of any computerized accounting system are the
following:-
i) Accounting framework : It is the application environment of the
computerized accounting system. A healthy accounting framework in
terms of accounting principles, coding and grouping structure is a pre-
condition for any computerized accounting system.
ii) Operating procedure : A well-conceived and designed operating procedure
blended with suitable operating environment of the enterprise is necessary
to work with the computerized accounting system. The computerized
accounting is one of the database-oriented applications wherein the
transaction data is stored in well-organized database. The user operates on
such database using the required interface and also takes the required reports
by suitable transformations of stored data into information.
16.8 DIFFERENCE BETWEEN MANUAL ACCOUNTING
AND COMPUTERIZED ACCOUNTING
Basis Manual Accounting Computerized Accounting
1. Recording Recording of financial Data content of these
transactions is through transactions is stored in well
books of original entry. designed data base.
260 ACCOUNTANCY
Computer in
2. Classification Transactions recorded in No such data duplications is Accounting
the books of original entry made. In order to produce ledger
are further classified by accounts the stored transaction
posting them into ledger data is processed to appear as
accounts. classified so that same is
presented in the form of report. Notes
3. Summarising Transactions are summar- The generation of ledger accounts
ized to produce trial is not a necessary condition for
balance by ascertaining the preparation of Trial Balance.
balancesofvariousaccounts.
4. Adjusting Adjusting entries are made There is nothing like making
to adhere to the principle adjusting entries for errors and
of matching. rectifications.
5. Financial The preparation of financial The preparation of financial
Statements statements assumes avail- statements is independent of
ability of trial balance. producing the trial balance.

I. Fill in the blanks with correct word/words :
i. In a manual accounting system, transactions recorded in the
books of __________.
ii. The generation of ledger accounts is not a necessary condition
for making __________ in a computerized accounting system.
iii. The computerized accounting system if capable of handling
__________ of transactions.
iv. The __________ accounting system is capable of offering quick
and quality reporting.
v. Computerized accounting system offers __________ facility to
store transaction data.
vi. Computerized accounting system is ________ to the manual
accounting system.
vii. The computerized accounting is one of the ______ oriented
applications.
i. Which one is not the characteristic of computer?
a) Speed b) Artificial Intelligence
c) Storage d) Versality
ACCOUNTANCY 261
Computer in
Accounting ii. Central Processing Unit (CPU) does not include
a) Control Unit b) Memory Unit
c) Arithmetic Logic Unit d) Output Unit
iii. The main limitation of computer is
a) Speed b) Storage
Notes c) Self decision making not possible d) versality
iv. Commonly accounting software is
a) Tally b) Window
c) Easy Books d) Credit Manager
v. Which one is not the basic requirements of Computerized
Accounting System?
a) Accounting framework b) Operating Procedure
c) Well Organised database d) Bank account

Computer is an electronic device that can perform a variety of operations in
accordance with a set of instructions called programme. It is a fast data
processing electronic machine. It can provide solutions to all complicated
situations.
Characteristics of Computer : Speed, storage, accuracy, diligence, versatility,
communication, processing, power
Components of Computer :Input Unit, Central Processing Unit, Output Unit,
Control Unit, Memory, Arithmetic Unit and Logic Unit
Limitations of a Computer : Cost of maintenance, installation, training, dangers
for health, self-decision making not possible
Computerized Accounting : Transaction Processing System (TPS) is the
first stage of computerized accounting system.
Need for computerized accounting : Numerous, instant reductions, flexible,
online, accuracy, security, transactions reporting in paper, reporting facility.
Difference between manual accounting and computerized accounting on the
basis of recording, classification, summarizing, adjusting and financial
statement
TERMINAL EXERCISE
1. What is meant by a Computer?
2. State the characteristics of a Computer.
3. Explain the components of computer.
262 ACCOUNTANCY
Computer in
4. Explain the limitations of a computer. Accounting
5. Explain the role of computers in accounting.
6. Differentiate between manual accounting and computerized accounting
system.
7. Enumerate the basic requirements of any computerized accounting system.
8. Briefly explain the applications of computerized accounting. Notes
9. Describe the stages of transaction processing system.
10. Why is computerized accounting needed? Explain.

16.1 (i) Processing (ii) Electrical (iii) Tiredness (iv) Communication
(v) Mouse (vi) Brain (vii) Monitor
16.2 (i) Software (ii) Computer (iii) Computer (iv) Manual
(v) Databases (vi) Software
16.3 I. (i) Original entry (ii) Trial balance (iii) Large number
(iv) Computerized (v) Online (vi) Superior
(vii)Database
II. (i) b (ii) d (iii) c (iv) a (v) d
ACTIVITY FOR YOU
Visit a shop or business organisation near your residence where computer
are used to maintain accounts and note ten points as benefits of using
computers in accounting than manual accounting.
ACCOUNTANCY 263
MODULE - VI
Computer in
17
Accounting
Notes
INTRODUCTION TO TALLY
As we discussed earlier how we maintain the accounts in Double Entry System. But
all of us know that if there is some difference in the Trial Balance than we have to
consume so much time and energy to find out that reason of difference. Tally is the
solution of all those problems. In Tally as we enter the transaction, that transaction is
duly posted in ledger and also enters in the trial balance. That transaction is duly
recorded in Trading & Profit and Loss A/c and Balance Sheet also. If we want to
see the Trial Balance or Balance Sheet after some transactions than we have to click
only some keys. So we can say that Tally solve our so many problems.
Tally is a financial accounting software package designed by Tally Solutions mainly
for small and medium businesses and shops. Tally Software is used by over 2 million
users, in 90 countries. Tally ERP 9.0 is the latest version to date. Tally is a complete
business accounting and inventory management software that provides various facilities
like Govt. supported formats, multilingual operations, online functions and processing
for small and medium business.
OBJECTIVES
After studying this lesson you will be able to :
state the meaning of Tally;
features of Tally;
important steps for starting Tally;
getting started with Tally;
important steps to open Tally;
how to create a company;
what is company Info;
short-cut Keys.
17.1 MEANING OF TALLY
Tally is accounting software that is designed to integrate and automate all your business
transactions. Every business has various processes which can range from simple to
complex. As your business grows, acquires new customers, and enters new markets,
you need to maintain highly accurate and up-to-date accounting and inventory records.
264 ACCOUNTANCY
Introduction to Tally MODULE - VI
Computer in
Accounting software, such as tally helps you to simplify, integrate, and streamline all Accounting
your business transactions in an easy and cost-effective manner. Tally ERP 9 is the
latest version of Tally, which comes in various enhancements to make handling and
processing of business transactions even easier and quicker. It can handle the accounts
of more than one company simultaneously. It is very simple to use and allows you to
enter data in various formats. In addition, you can view information of any period, Notes
compare data across companies and financial periods, maintain account details and
generate reports.
17.2 FEATURES OF TALLY
Main features of Tally are as under:-
i) It maintains all the primary books of accounts, like Cash Book and
Bank Book.
ii) Tally maintains all registers like Purchase Register, Sales Register and
Journal Registers.
iii) Tally maintains all statement of accounts like Balance Sheet, Profit
and Loss A/c and Trial Balance, Cash Flow(In cash flow statement we
see the flow of cash i.e. the inflow and outflow of the cash) Stock
Statement(In stock statement we maintain the proper record of all
inventory) and Ratio Analysis.
iv) A Tally can maintain Outstation Reports.
v) It may provide complete bill-wise information of amounts receivable
as well as payable either party-wise or group-wise.
vi) It can provide a report for a particular date or reports for any range of
dates.
vii) It provides the facility of Bank Reconciliation.

State the following sentences True or False:
i. Tally is an accounting hardware.
ii. We can also maintain the record of inventory in Tally.
iii. There is no provision of outstation Report in Tally.
iv. Tally provides the facility of Bank Reconciliation.
v. Tally maintains all the primary books of accounts.
vi. Tally provides a report for a particular date.
ACCOUNTANCY 265
MODULE - VI Introduction to Tally
Computer in
Accounting 17.3 GETTING STARTED WITH TALLY
First of all we have to install a Tally.ERP 9 by default in which program files required
to run Tally are saved. The user can specify the location of the data directory to save
these files and install the program file on any drive. It does not take more than a
minute to install Tally.ERP 9 on the local hard disk and uses up only about 40 MB of
Notes
space.
Following is the list of basic hardware requirements to run Tally.ERP 9 on a computer
system:-
Hardware Requirement Configuration
Processer Intel Pentium IV or Higher
Memory 256 MB RAM or more
Free Hard Disk Space 40 MB minimum (excluding the data)
Monitor Resolution Recommended 1024*768 pixels or higher
In order to install Tally.ERP 9 on a computer, you must have sufficient user-
rights so that you can make necessary changes during the installation process.
Also, ensure that the operating system you employ supports Tally.ERP 9 FOR
MULTILINGUAL support.
17.4 IMPORTANT STEPS TO OPEN A TALLY
Perform the following steps to open Tally.ERP.9:
i) Click the Start button on the taskbar. A Start menu appears.
ii) Move the mouse-pointer over the All Programs option in the start menu.
iii) Move the mouse-pointer over the Tally.ERP 9 folder and click it.
iv) Move the mouse-pointer over the Tally.ERP 9 option and click it.
The Tally.ERP 9 window opens on your screen.
17.5 CREATE COMPANY
After installing Tally, the first task you need to carry out is to create a company.
In Tally, the first term company signifies an entity for which an independent
set of accounts is maintained. It may be a company, a partnership firm, an
industry, or even a branch office for which a set of accounts is maintained.
So, lets now learn to create a company in Tally.
On the home page of Tally screen Create Company option is available under the
title Company Info.
266 ACCOUNTANCY
Computer in
Accounting
Notes
When you click at Create Company option, a following window will appear with
various items on the screen.
Some important ones are discussed below:-

Name : Type the name of the company you want to create.
Mailing Name : The mailing name by default is the same as the name mentioned
above. You can type some other mailing name of the company.
Address : Type mailing address of the company. There is no limit on the number of
lines used.
ACCOUNTANCY 267
Computer in
Accounting Maintain : In Tally, accounts can be maintained in a two different ways:-
Accounts Only
Accounts with inventory.
In Accounts you can maintain Accounts only; there is no record of inventory. In
second option we record all Accounts with all inventories.
Notes
Use Security Control : This option provides security control to your company
accounts by offering a comprehensive password based access control
After filing all the required information press enter. A new window will appear asking
for confirmation.
Accept?
YES/ NO
After press OK or ENTER KEY your Company will be created.
17.7 COMPANY INFO
Once you get your company created, the heading Company Info has a content of
some new options. These options are as follows:-
Select Company : This option permits you to load any company, which
was created earlier, from the list of companies listed.
Shut Company : It allows you to exit, from the companies not in use, from
the dialog box.
Create Company : (same as done above under same heading).
Alter : It allows you to change the information of an existing company, filled
at the time of creation of company.
Change Tally Vault : To change the password, given earlier at the time of
creating the company.
Split Company Data : Split the companies to form two companies out of
the existing one; after the data specified by the user. In this process the
closing balance of the first company will become the opening balance of the
second company.
Backup/Restore : This option allows the user to take a backup either on
local hard disk or on any external media. The backup of one or more
companies can be taken under a single directory.
17.8 SHORT-CUT KEYS
In Tally there are so many short-cut keys. By using those keys we can save our time.
Uses of some keys are as follows:-
F1 : For Select and Shut Companies
F2 : For Date and Period
268 ACCOUNTANCY
Computer in
F3 : For Company and Company Info Accounting
F 11 : Features
F 12 : Configure
After creating a company in Tally, we can start the work in our company by IST
prepare the accounts. Thereafter you have to classify the nature of account. You
have to create all accounts either they are personal or impersonal. In Tally we have Notes
to pass only voucher entry. The Trial Balance, Trading and P&L a/c and Balance
Sheet will be automatically done. We can see the Trial Balance and Balance Sheet
whenever required.

Multiple Choice Questions
i. If we want to change the company profile than what command
a) Alter command b) Edit command
c) Change command d) Create Company
ii. For go on Features which short cut key will you use
a) F 1 b) F 12 c)F 11 d)F 3
iii. Which short cut key we will use for configure?
a) F 3 b) F 1 c) F 11 d) F 12
iv. What short cut key we would use for Select and Shut Company?
a) F 1 b) F 2 c) F 3 d) F 12
v. What short cut key we would use for Date and Period?
a) F 1 b) F 2 c) F 3 d) F 11

Tally is a financial accounting software package designed by Tally Solutions
mainly for small and medium businesses and shops. Tally Software is used
by over 2 million users, in 90 countries.
Tally maintains all statement of accounts like Balance Sheet, Profit and Loss A/
c and Trial Balance, Cash Flow, Stock Statement and Ratio Analysis.
It can provide a report for a particular date or reports for any range of
dates. First of all we have to install a Tally.ERP 9 by default in which
program files required to run Tally are saved. The user can specify the
location of the data directory to save these files and install the program
file on any drive. After installing Tally, the first task you need to carry
out is to create a company. In Tally, the first term company signifies an
entity for which an independent set of accounts is maintained.
ACCOUNTANCY 269
Computer in
Accounting Uses of some important keys are as follows: - F 1, F 2, F 3, F 11 and F 12.
TERMINAL EXERCISE
1. Define Tally.
Notes 2. What do you mean by Tally ERP 9?
3. Write any four features of Tally.
4. What are the basic hardware requirements configuration of Tally ERP 9?
5. Explain in detail as how the company is created in Tally.

17.1 (i) False (ii) True (iii) False (iv) True (v) True (vi) True
17.2 (i) b (ii) c (iii) d (iv) a (v) b
ACTIVITY FOR YOU
Using a tally software create a company and pass 10 entries from previous
chapters of your learning matereial and try to have practice on it to get
perfection.
270 ACCOUNTANCY
CURRICULUM
ACCOUNTANCY
(SECONDARY COURSE)
1. Rationale
Todays business environment is very complex but at the same time the growth and development through business,
profession and vocational activities have made our lives very comfortable. Recording, grouping and analyzing of
monetary transactions for both business and non-business have become very significant. As a result of this growth
and development. Accountancy as an optional elective subject has become a main part of curriculum for students
at Secondary and Senior Secondary level since the switching over of the school system from Higher Secondary to
10+2 system.
NIOS already imparting education offers Accountancy as an optional elective subject at Senior Secondary level
but not at Secondary level. Now, a new subject titled as Accountancy is being offered to the students of NIOS
at the Secondary level. Accountancy being the language of business to knowledge at Secondary level has become
significant. Its knowledge empowers; the learners in recording, group and analyzing the business transactions, so
that quick and correct business decisions could be taken. The elementary knowledge of accountancy at Secondary
level will enable the learners to understand, the complexities of the subject. And to deal with the situations of the
present days accounting.
2. Objectives
The broader objectives of teaching Accountancy at Secondary level are to enable the learners to:
to understanding the meaning, objectives, advantages, term used and basic concepts and connections of
Accountancy;
to develop the skill of preparing the accounting equation;
classify the accounts into different categories, understand the rules of debit and credit and develop the skill
of preparing accounting vouchers;
have practical knowledge of preparing the various books of accounts like journal; cash book other subsidiary
books and ledger;
appreciate the need of preparing bank reconciliation statement;
learn the technique of posting of the transactions from journal and other subsidiary books to ledger and
prepare the trial balance;
Identify the accounting errors to learn their rectification;
understand the need for charging depreciation and the straight line and diminishing balance methods of
charging depreciation;
appreciate the need for creating provisions and reserves and rules to do so;
preparing of Financial statements of a sole trader without and with adjustments ;
understand the need, importance and advantages of computerized accounting and use of software Tally;
3. Course Structure
The syllabus of Accountancy is divided into six modules .
i
Module Title Marks Hours
1. Introduction and basic concepts 20 48
2. Journal and other subsidiary books 25 60
3. Ledger, Trial Balance and Accounting Errors 14 34
4. Depreciation, Provisions and Reserves 12 32
5. Financial Statements 20 48
6. Computers in Accounting 09 18
Total 100 240
4. Evaluation
Evaluation for this subject would consist of internal evaluations through Tutor Marked Assignments (TMA) and
external examination. The external examinations will be conducted twice a year i.e. in the months of April and
October. TMA will be treated as a learning tool. It will enable the learners to know their progress and to prepare
well for the examination. The project work will help the learners in recording, group and analyzing the monetary
transactions on the basis of the final products in the form of financial statements. Besides the above strategies of
evaluation, certain inbuilt components for self evaluation in the form of Intext Questions, Terminal Questions and
Activity for learners would also be provided in each lesson.
5. Course Description
5.1 Introduction and Basic Concepts 20 Marks 48 Hours

Accounting is indispensable in the modern society. This module will help the students to understand the meaning of
various terms used in accounting, meaning, objectives, advantages and limitations of book keeping and accountancy
and the difference between the two. The module will also give an insight to the learners about the various Concepts
and Conventions applied in the field of accounting and develop accounting equation on the basis of the knowledge
so obtained.
5.1.1 Introduction to Accounting
Book Keeping : Meaning, Need, Objectives and advantages
Accounting : Meaning, Objectives, advantages and limitations
Difference between Book Keeping and accounting
Users of Accounting information and their needs.
5.1.2 Accounting Concepts and Conventions
Concepts: Dual Aspect, Money Measurement, Business entity and Going Concern.
Conventions : Materiality, Conservatism and Consistency
5.1.3 Accounting Terms
Accounting Terminology : Capital, Drawing, Assets and Liabilities, Asset, Revenue, Expenditure, Expense,
Profit, Loss, Purchases, Sales, Stock, Debtors, Creditors, Receivables, Payables, Debit and Credit.
Case Study
ii
5.2 Journal and other subsidiary Books. 25 Marks 60 Hours
This module will help the students to understand the rules of Debit and Credit and develop the skill of applying
these rules in recording the transactions in journal and other subsidiary books. It will also help them in preparing the
different subsidiary books such as Cash Book, Purchase Book, Sales Book, Purchase Book, Return Book and
Sales Return Book.
5.2.1 Accounting Equation
Meaning of Accounting Equation
Effects of transactions on Accounting Equation
Preparation of Accounting Equation.
5.2.2 Double Entry System
Meaning and classification of Accounts
Rules of Debit and Credit
Source Documents
Accounting Vouchers : Meaning, types and Preparation
5.2.3 Journal
Journal : Meaning and Format
Journal entries
5.2.4 Cash Book
Meaning, Types of Cash Book
Preparation of Simple Cash Book
Preparation of Cash Book with Bank Column
Preparation of Petty Cash Book
5.2.5 Bank Reconciliation Statement
Meaning and Purpose
Preparation of Bank Reconciliation Statement.
5.2.6 Purchase and Sales Book
Meaning and types
Preparation of Purchase Book, Sales Book, Purchase Return Book and Sales Return Book
5.3 Ledger and Trial Balance 14 Mark 34 hours

This module will enable the learners to develop the skill of preparing the ledger and trial Balance. They will be able
to identify the different accounting errors, classify the same and learn the ways to rectify the errors.
5.3.1 Ledger
Meaning and Purpose
Difference between Journal and Ledger
Posting of Journal and Other subsidiary books to ledger
Balancing of ledger accounts
iii
5.3.2 Trial Balance and Accounting Errors
Trial Balance : Meaning, Objective and limitations
Preparation of Trial Balance
Suspense Account
Types of Accounting Errors and their rectification
5.4 Depreciation, Provisions and Reserves 14 Marks 32 Hrs.

This module will help the learns to understand the methods of spreading the cost of fixed assets throughout their
working life using the concept of Depreciation. They will also be able to describe the need and importance of
creating Provisions Reserves.
5.4.1 Depreciation: Meaning, Causes and Objectives
Method of Charging depreciation : Straight line and diminishing Balance
Accounting Treatment
5.4.2 Provisions and Reserves
Provisions : Meaning and need
Reserves : Meaning and Types
Difference between Provisions and Reserves
5.5 Preparation of Financial Statements 20 Marks 48 Hrs.

This module will enable the learners to understand the meaning and need for preparing financial statements which
are the final outcome of the accounting practice. They will learn the steps of the preparation of Income statement
and Balance Sheet. The learners will also learn to adjust the different items of adjustment which are provided in the
form of additional information (adjustment).
5.5.1 Financial Statements (without adjustments)
Financial Statements : Meaning and users
Preparation of Trading and Profit and Loss Account of a Sole Trader.
Preparation of a Balance Sheet of a Sole Trader.
5.5.2 Financial Statements (with adjustments)
Preparation of Trading and Profit and Loss Account and
Account and Balance Sheet of a Sole Proprietor with simple adjustments for
Closing Stock: Outstanding expenses. Prepaid Expenses and Depreciation
5.6 Computer in Accounting Marks 9 Hours 18

This module will enable the learns to understand the meaning and characteristics of a computer with its components
and limitations. It also emphasises on use of computers in Accounting. It will also make you to learn the difference
between manual accounting and computerised accounting. One should be able to know the basic requirements of
computerised accouning. Once you are able to know the use and importance of computers in accounting you must
understand the meaning, features and importants steps for starting Tally ERP 9.0, together with how to create a
company in Tally.
iv
5.6.1 Computers in Accounting
Application of Computer in Accounting
Comparison of Manual and Computerized Accounting
5.6.2 Introduction to Tally
Introduction to Tally
Features and important steps for starting Tally.
Creation of a company in Tally.
v
SAMPLE QUESTION PAPER
ACCOUNTANCY
SECONDARY COURSE
Learners,a new course at Secondary level is introduced in Accountancy with effect from the year 2013-14 . The
course is designed to cater the need of youth at Secondary level together with the demand of stakeholders. This
course is a base for you to adopt and understand accountancy in much more easier way at Sr. Secondary level. In
the following pages you will find a question paper design followed by sample question paper and marking scheme.
The question paper design will guide you about the type of questions, number of questions along with the marks
assigned to each question and the marks allotted to each module.
This sample question paper consists the same number and similar type of question paper that you find in your final
examination. For example, you will get 6 questions of multiple choice each carrying one mark, 5 questions of very
short answers type each carrying 3 marks, 2 question of short answer types each carrying 4 marks, 5 long questions
of 5 marks, 6 long questions of 6 marks and one very long question of 10 marks. So you will get 25 questions and
the total marks are 100.
The sample question paper is followed by a marking scheme in which expected answers (value points) to the
questions are given. This has been given here to illustrate how to attempt the questions. The distribution of marks
according to the value points of each answer have also been given.
We hope you will find the Marking Scheme useful in completing this course. In case you have any problem fell free
to write NIOS.
vi
Subject: Accountancy Class: X

Maximum Marks: 100 Time: 3 hrs.
1. Weightage by Objectives
Objectives Marks % of total marks

Knowledge 30 30
Understanding 50 50
Application 20 20
100 100
2. Weightage by types of Questions
Types of No. of Marks Total Estimated time a candidate

Question Questions per questions marks is expected to take
M.C.Q. 6 1 6
V.S.A. 5 3 15
S.A. 2 4 8
Long Answer I 5 5 25
Long Answer II 6 6 36
V.L.A 1 10 10
25 100 165+15=180
3. Weightage by Contents
Modules Marks
1. Introduction to Accounting 20
2. Journal and Other Subsidiary Books 25
3. Ledger, Trial Balance and Accouning Errors 14
4. Depreciation, Provisions and Reserves 12
5. Financial Statements 20
6. Computer in Accounting 09
vii
ACCOUNTANCY
(SECONDARY COURSE)
Time : 3 Hours Maximum Marks: 100
Answer all the questions

1. Which of the following is a fixed asset? (1)
a) Cash b) Machinery c) Creditor d) Capital
2. Which of the following account always has a Credit Balance ? (1)
a) Asset account b) Liability account c) Expense accounts d) Personal account
3. The Trial Balance Shows : (1)
a) both debit and Credit Balances b) only debit Balances
c) only credit Balances d) none of the above
4. Depreciation arises due to : (1)
a) Efflux of time b) Fall in the market value of an asset
c) Fall in the value of money d) All of the above
5. The loss or sale of an old motor car is debited to : (1)
a) Profit and Loss Account b) Motor Car Account
c) Depreciation Account d) Trading Account
6. Which of the following is not an input device: (1)
a) Scanners b) Key boards c) Printer d) Light Pen
7. Find out the missing information from the following data A = L +C (3)
a) ` 10,000 = ` 7500 + ?
b) `10,000 = ` 2500 + ?
c) `. 5000 = ? + `. 4000
8. Classify the following into Assets, Liabilities, Revenue and Expenses : (3)
a) Machinery b) Purchases c) Stock d) Sales e) Cashf) Creditors
9. On which side will the increase in the following accounts be recorded : (3)
a) Machinery account b) Creditors account c) Mohan (Proprietor)
d) Salary e) Sales f) Cash
10. Distinguish between trading Account and Profit & Loss Account (any three) (3)
11. How do you open a Tally. ERP9? (3)
12. Explain the Business entity and Going concern concepts. (4)
viii
13. Enter the following transactions in a Bank column Cash Book. (4)
2009 `
January 01 Cash in Hand 12,000
January 05 Received from Ram 3,000
January 07 Paid Rent 300
January 07 Cash Deposited into Bank 10,000
January 08 Sold goods for cash 3,000
January 10 Paid to Shyam 7,000
January 27 Purchased Furniture for cash 2,000
January 27 Withdraw from Bank for personal use 5,000
January 31 Paid Salaries 1,000
January 31 Received a cheque from Mohan Brothers and
deposited into Bank on the same date 20,000
14. Record the following transactions in the Subsidary Books of Javed. (5)
2012
August 1. Purchased goods of list price ` 10,000 at a trade discount of 20% from Mohan.
August 2. Purchased goods of list price ` 20,000 from Sketa at a trade discount @ 30%.
August 3. Sold goods of list price ` 5000 to Manas at 5% Trade discount.
August 4. Purchased goods from Shanker list price ` 7,000 at 25% trade discount.
August 5. Sold goods to Ravi list price ` 4000 at 10% trade discount.
August 6. Sold to Manoranjan goods list price ` 300 at 5% trade discount.
August 7. Returned to Mohan goods of list price ` 500.
August 8. Mohan returned goods of list price ` 50.
August 9. Returned to Shanker goods of list price ` 200.
August 10. Ravi returned goods of list price ` 80.
15. The following balances were extracted from the books of Shri S. Pal on 31st March 2009. You are
required to prepare a Trial Balance. The amount required to balance should be entered as capital.
(5)
Particulars `
Purchases 17,000
Stock (April 1, 2008 24,000
Sales 1,05,000
Sundry Debtors 23,800
Discount Received 3,500
Carriage Outward 700
Cash in hand 3,500
Machinery 1,24,500
Provision for Depreciation 24,200
Drawings 7,700
Return inward 3,500
Premises 5,28,000
Sundry Creditors 16,100
Discount Allowed 2,800
Carriage inward 1,400
ix
Cash at Bank 17,500
General Expenses 2,100
Bad depts. Written off 2,450
Provision for Doubtful Debts 2,380
Capital (Balancing figure) 7,60,770
16. What is meant by the term accounting errors? Explain in brief the errors which are not disclosed by the
Trial Balance. (1 +4 = 5)
17. Ram Brothers acquired a machine on 1st July 2006 at a cost of ` 1,40,000 and spent ` 10,000 on its
installation. The firm writes off Depreciation @10% p.a. on original cost every year. The books are closed
on 31st December every year. Show the Machinery Account and Depreciation Account for 3 years. (5)
18. Differentiate between Manual accounting and computerized accounting system? (5)
19. Explain the following : (6)
i. Convention of Consistency
ii. Convention of Conservatism
iii. Convention of Materiality
20. Develop accounting equation from the following transaction : (6)
`
i) Mohan commenced business with cash 50,000
ii) Purchased goods for cash 30,000
iii) Purchased goods on credit from Govind 20,000
iv) sold goods for cash 12000
v) Bought furniture on credit from Kapil 2000
vi) Paid cash to creditor (Govind) 15,000
21. Record the following transactions in the journal of Vishal : (6)
2010 `
May 1 Commenced business with cash 5,00,000
May 2 Goods purchased from Mohan for cash 50,000
May 3 Goods purchased from Ajay 1,20,000
May 4 Goods returned to Ajay 20,000
May 15 Goods sold to Rajiv 4,000
May 25 Paid Salaries 500
22. Prepare Credit Vouchers from the following information, gathered from supporting vouchers of M/s.
Genius Leather Stores, Meerut. (6)
2012 `
(i) July 5 Received cash from Sohan & Co. on Account
vide cash receipt No. 35 12,000
(ii) July 10 Commission received vice cash receipt No. 74 3,500
(iii) July 15 Sold leather purses for cash vide
(iv) July 24 Sold two old leather colouring machines vide
x
23. What is meant by Provisions? Give any two points of difference between Provisions and Reserves.
(6)
24. Give the meaning of Financial statements and state its objectives. (6)
25. From the following Trial Balance of Sri. R. Rajan, prepare the Trading and Profit and Loss Account for the
your ended 31st March 2009 and the Balance sheet as on that date after taking into account the adjustments
given below: (10)
TRIAL BALANCE
As at 31st March 2012
Particulars Dr. Cr.
Rajans Capital 2,90,000
Rajans Drawings 7,600
Purchase and Sales 89,000 1,50,000
Sales and Purchase returns 2,800 4,500
Stock (1st April 2008) 12,000
Wages 8,000
Building 2,20,000
Freight & Carriage 20,000
Trade Expenses 2,000
Advertisement 2,400
Interest received 3,500
Taxes and Insurance 1,300
Debtors and Creditors 65,000 12,000
B/R and B/P 15,000 7,000
Cash at Bank 12,000
Cash in hand 1,900
Salaries 8,000
4,67,000 4,67,000
Adjustments:
i) Stock on 31st March, 2009 was valued at ` 15,000.
ii) Insurance was prepaid to extent of ` 400
iii) Outstanding liabilities were: Salaries ` 2,000 and Taxes ` 1300.
iv) Depreciate Building at 2% p.a.
OR
i) State the objectives of preparing balance sheet.
ii) Pass necessary adjustment entries from the following information at 31.3.2012 for preparing financial
statements of M/S Ram & Sons
a) Closing stock was ` 5,000.
b) Depreciation of ` 3,000 was to be charged on Machineary.
c) Salary outstanding was ` 1,000.
d) Insurance included ` 500 for the next year.
e) Wages outstanding were ` 2,000.
xi
MARKING SCHEME
ACCOUNTANCY
(SECONDARY COURSE)
Q.N. Expected Value Points Marks
1. (b) Machinery (1)
2. (a) Liability account (1)
3. (a) both debit and credit balances (1)
4. (a) efflux of time (1)
5. (a) Profit and loss account (1)
6. (c) Printer (1)
7. a) ` 2,500 b) ` 7,500 c) ` 1,000 (1 X 3 = 3)
8. a) Assets b) Expenses c) Assets ( 1 2 X 6 = 3)
d) Revenue e) Assets f) Liability
9. a) Debit side b) Credit side c) credit side ( 1 2 X 6 = 3)
d) Debit side e) Credit side f) Debit side
10. (1 x 3 = 3)
S.No. Trading A/c Profit and Loss A/c
i. This account shows the gross Profit or This account shows the net Profit or net
gross loss for an accounting year loss for an accounting year
ii. All direct revenue items are shown on the All Indirect revenue items are shown on the
credit side of this account credit side of this account
iii. All direct expenses related to business All Indirect Expenses related to business are shown
are shown on debit side of this account on the debit side of this account
11. Perform the following steps to open Tally ERP 9 : (3)
i. Click the start button on the taskbar. A start menu appears.
ii. Move the mouse pointer over the all programs option in start menu.
iii. Move the mouse pointer over the Tally, ERP 9 folder and click it.
iv. The Tally, ERP 9, Window opens on your screen.
12. i. Business entity concept - refer to old material (2 + 2 = 4)
ii. Going concern concept - refer to old material
xii
13. Cash Book
Dr. Cr.
Receipts Payment
Date Particulars Bank Cash Date Particulars Bank Cash
2009 2009
Jan. 1 To Bal b/d 12,000 Jan. 7 By Rent 300
Jan. 5 To Ram 3,000 Jan. 7 By Bank 10,000
Jan. 7 To Cash 10,000 Jan. 10 By Shyam 7,000
Jan. 8 To sales A/c 3,000 Jan. 27 By furniture A/c 2,000
Jan. 31 Mohan Bros. 20,000 Jan. 31 By Drawings 5,000
Jan. 31 By Salaries A/c 1,000
By Bal c/d 25,000 7,700
30,000 18,000 30,000 18,000
Feb. Bal b/d 25,000 7,700
14. PURCHASE BOOK

Date Particulars L.F. Amount Amount
2012 (`) (`)
Aug. 1 Mohan 10,000
(-) Trade discount 20 % 2,000 8,000
Aug. 2 Ekta 20,000
(-) Trade Discount 30 % 6,000 14,000
Aug. 4 Shankers 7,000
(-) Trade discount 25 % 1,750 5,250
Purchase a/c Dr. 27,250
SALES BOOK
2012
Aug. 3 Manas 5,000
(-) Trade discount 5% 250 4,750
Aug. 5 Ravi 4,000
(-) Trade discount 10 % 400 3,600
Aug. 6 Manorama 3,000
(-) Trade discount 5% 150 2,850
Sales a/c Cr. 11,200
xiii
PURCHASE RETURN BOOK
2012
Aug. 7 Mohan 500
(-) Trade discount 20% 100 400
Aug. 9 Shankar 200
Purchase Return A/c Cr. 550
SALES RETURN BOOK

2012
Aug. 8 Ravi 500
Aug. 10 Manorama 800
Sales Return a/c Dr. 1,210
15. TRIAL BALACE

As at March 31, 2009
Particulars Dr. Balance Cr. Balance
` `
Purchases 17,000 -
Stock (April 1, 2008 24,000 -
Sales - 1,05,000
Sundry Debtors 23,800 -
Discount Received - 3,500
Carriage Outward 700 -
Cash in hand 3,500 -
Machinery 1,24,500 -
Provision for Depreciation - 24,200
Drawings 7,700 -
Return inward 3,500 -
Premises 5,28,000 -
Sundry Creditors - 16,100
Discount Allowed 2,800 -
Carriage inward 1,400 -
Cash at Bank 17,500 -
General Expenses 2,100 -
Bad depts. Written off 2,450 -
Provision for Doubtful Debts - 2,380
Capital (Balancing figure) - 7,60,770
9,11,950 9,11,950
xiv
16. Error which makes the trial balance to disagree and due to which the result of business are misleading is
known as accounting error.
Errors which are not disclosed by the trial balance are : (with brief explaination)
i) Errors of Complete Ommission
ii) Errors of Commission
iii) Compensating Errors
iv) Errors of Principles
17. Machinery A/c
Dr. Cr.
Date Particulars Amount Date Particulars Amount
2006 2006
July 1 To Bank A/c 1,40,000 Dec. 31 By Depreciation 7,500
10 6
July 1 To Bank A/c 1,50,000
100 12
Installation and Expenditure 10,000 Dec. 31 By Balance c/d 1,42,500
1,50,000 1,50,000
2007 2007
Jan. 1 To Balance b/d 1,42,500 Dec. 31 Depreciation A/c 15,000
Dec. 31 Balance c/d 1,27,500
1,42,500 1,42,500
2008 2008
Jan. 1 To Balance b/d 1,27,500 Dec. 31 By Depreciation A/c 15,000
Dec. 31 Balance c/d 1,12,500
1,27,500 1,27,500
2009 2009
Jan. 1 To Balance b/d 1,12,500
Depreciation A/c
2006 2006
Dec. 31 To Machinery A/c 7,500 Dec. 31 By Profit and Loss A/c 7,500
2007 2007
2008 2008
18. Comparison of Manual and Computerised Accounting System :
i. Identifying Financial Transaction : Identifying Financial Transactions and recording in the books
of A/c by applying principles common under both the process.
ii. Recording : The Process of recording in the books of original entry, posting, them in the ledger
account, performing mathematical functions. In computers processed transactions are recorded in
xv
the books of a/c and the remaining functions are performed without any further process.
iii. Clarification : In the manual process the transactions are recorded in the books of original entry
and posted into the ledger a/c. In computerized accounting the posting process is carried out by
internal sorting of data.
iv. Summarizing : In the manual system of accounting the data under each ledger is summarized and in
computrized accounting a transaction or event once recorded is sorted in the order in the data base.
v. Adjustment Entries : Adjustment entries are passed to rectify an error or to follow the matching
concept of Accounting. The process of passing adjustment entries can be equated with the recording
process.
19. i. Dual aspect concept : According to this concept every business transaction is recorded as
having a dual aspect. In other words, every transaction affects, atleast two accounts. One account
is debited and the other account is credited.
ii. Sales : The term sales is used only for the sales of those goods which are purchased for resale
purpose. It also includes revenues from services provided to customers. It includes both cash and
credit sales.
iii. Business Entity Concept : According to this concept, business is treated as a unit separate and
distinct from its owners.
iv. Money Measurement Concept : Only those transactions and events are recorded in accounting
which are capable of being expressed in terms of money. An event, even though it may be very
important for the business, will not be recorded in the books of business.
20. S.No. Transaction Assets Liabilities+Capital
1. Mohan commenced business Cash + stock + furniture = Capital
with ` 50,000
2. Equation 50,000 = 0 + 50,000
Purchased goods for cash
for ` 30,000 (-) 30,000 + 30,000 + 0 = 0 + 50,000
3. New equation 20,000 + 30,000 + 0 = 0 + 50,000
Purchased goods on Credit + 20,000 = 20,000
for ` 20,000
4. New equation 20,000 + 50,000 + 0 = 20,000 + 50,000
Sold goods for cash
for ` 12,000 12,000 - 12,000 + 0 = 20,000 + 50,000
5. New equation 32000 + 38000 + 0 = 20,000 + 50,000
Bought furniture on Credit
for ` 2,000 0+0+2000 = 2,000 + 0
6. New equation 32,000 + 38,000 + 2,000 = 22,000 + 50,000
Paid Cash to creditors -15,000 + 0 + 0 -15,000 + 0
Final equation 17,000 + 38,000 + 2,000 = 7,000 + 50,000
xvi
21.
Date Particulars L.F. Amount Amount
1 May Cash a/c Dr. 50,000
To Capital a/c 50,000
(Amount brought in by vishal as capital)
2May Purchases A/c Dr. 50,000
To cash A/c 50,000
(goods purchased from Mohan for cash)
3 May Purchases A/c Dr. 1,20,000
To Ajay 1,20,000
(goods purchased from Ajay)
4 May Ajay Dr. 20,000
To Purchase Return A/c 20,000
(for good return to Ajay)
15 May Rajiv Dr. 5,000
To Sales A/c 5,000
(Goods sold to Rajiv)
25 May Salaries A/c Dr. 500
To cash A/c 500
(for salaries paid)
6,94,500 6,94,500
22. Solution :
(i) M/s. Genius Leather Stores, Meerut

Amount (`)
Credit : M/s. Sohan & Co. 12,000
(Being Cash received on account from Sohan & Co. vide
12,000
Sd/- Sd/-
Manager Accountant
xvii
(ii) M/s. Genius Leather Stores, Meerut

Amount (`)
Credit : Commission A/c. 3,500
(Being the amount of commission received vide
3,500
Sd/- Sd/-
Manager Accountant
(iii) M/s. Genius Leather Stores, Meerut

Amount (`)
Credit : Sales A/c. 4,500
(Being the amount of cash sales vide
Cash Memo No. 412)
4,500
Sd/- Sd/-
Manager Accountant
(iv) M/s. Genius Leather Stores, Meerut

Amount (`)
Credit : Leather Colouring Machine 12,500
(Being two old leather colouring machine sold for cash vide
Cash Memo No. 3714)
12,500
Sd/- Sd/-
Manager Accountant
23. When there are certain expected losses/ expenses, these are planned to be managed in advance from the
current years profits/ surplus. The amount which is kept separately to meet such expected losses/expenses
is called a Provision.
S. No. Provisions Reserves
1. It is created by debiting the It is created by debiting the Profit &
Profit & Loss A/c. Loss Appropriation A/c.
2. It is a charge against the profits It is an appropriation of profits and
without which true profit or loss doesnt require to be created to
of the business cant be ascertained. ascertain true profit or loss.
xviii
24. The statements, prepared to know the result of the business and the financial position of the business, are
called financial statements. Following are the objectives of preparing financial statements:
i) Ascertain the result of business activities ii) Ascertain the financial position of business
iii) Correct decision making iv) Judging the performance of management
v) Ascertaining the cash position of business
25. Solution :
Trading & Profit and Loss A/c of R. Rajan for
Dr. the year ended 31.3.2009 Cr.
Particular Amount Particular Amount
To Opening Stock 12,000 By Sales 1,50,000
To Purchase 89,000 Sales Returns -2,800 1,47,200
Purchase Returns - 4,500 84,500 By Closing Stock 15,000
To Wages 8,000
To Freight and Carriage 20,000
To Gross Profit T/F to P/L A/c 37,700
1,62,200 1,62,200
To Trade Expenses 2,000 By Gross Profit 37,700
To Advertisement 2,400 By Interest Received 3,500
To Taxes and Insurance 1,300
Add : Unpaid Taxes & Ins. 1,300
Less : Prepaid Ins. Taxes - 400 2,200
To Salaries 8,000
Add : Unpaid Salaries 2,000 10,000
To Depreciation on Building 4,400
To Net Profit transferred to Capital A/c 20,200
41,200 41,200
Balance Sheet of R. Rajan as at 31.3.2009

Current Liabilities Current Assets
Creditors 12,000 Cash in hand 1,900
Bill Payable 7,000 Cash at Bank 12,000
Outstanding Liability Bill Receiable 15,000
Taxes 1,300 Debtors 65,000
Salaries 2,000 3,300 Prepaid Insurance 400
Capital Opening Bal. 2,90,000 Closing Stock 15,000
Add : Net Profit 20,200 Fixed Asset :
Less : Drawing 7,600 3,02,600 Building 2,20,000
Less : Depreciation 4,400 2,15,600
3,24,900 3,24,900
xix
OR
i) Balance sheet is prepared to achieve following objectives:
a) To know the financial position of the business.
b) To know the position of internal liabilities and external liabilities of the business so that
timely arrangement can be made for their payment.
c) To know the position of fixed assets and current assets.
d) To plan activities for future on the basis of present financial position.
ii) (a) The following adjustment entry will be passed at the end of the year:
31.3.2012 Closing Stock A/c Dr. 5,000
(For Closing stock transferred to Trading A/c)
(b) Entry for charging depreciation will be as under:
31-3-2012 Depreciation A/c Dr. 3,000
To Plant&Machinery A/c 3,000
(For depreciation charged on Machinery)
(c) Adjustment entry will be as under:
31.3.2012 Salaries A/c Dr. 1,000
To Salaries outstanding A/c 1,000
(For salary outstanding for the year 2011-12)
(d) Adjustment entry for prepaid Insurance will be as under:
31.3.2012 Prepaid Insurance A/c Dr. 500
To Insurance A/c 500
(For Insurance paid in advance for
next year 2012-13)
(e) The adjustment entry will be:
31.3.2012 Wages A/c Dr. 2,000
Wages outstanding A/c 2,000
(For wages outstanding for the year 2011-12)
xx

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Secondary Course

NATIONAL INSTITUTE OF OPEN SCHOOLING

A-24-25, Institutional Area, Sector-62, NOIDA-201309 (U.P.)

National Institute of Open Schooling

GRAPHICS, COVER DESIGN AND DTP

Textual material production is an integral and essential part of curriculum

Let me wish you all a happy and successful future.

(Dr Kuldeep Agarwal)

(Dr. Piyush Prasad)

Objectives : These are statements of outcomes of learning expected

NIOS WINS National Award for e-Governance 2008-09

NIOS receives NCPEDP MPHASIS Universal Design Awards 2012

The Manthan Award South Asia & Asia Pacific 2012

Introduction and Basic Concepts

Lesson 1 : Introduction to Accounting

TOI Social Impact Award 2012

National Awards for the Empowerment of Persons with Disabilities, 2012

INTEXT QUESTIONS 1.2

1.5 USERS OF ACCOUNTING INFORMATION

INTEXT QUESTIONS 1.3

WHAT YOU HAVE LEARNT

ANSWER TO INTEXT QUESTIONS

ACCOUNTING CONCEPTS AND Notes

INTEXT QUESTIONS 2.1

INTEXT QUESTIONS 2.2

INTEXT QUESTIONS 2.3

INTEXT QUESTIONS 2.4

2.6 MEANING OF ACCOUNTING CONVENTIONS

2.7 CONVENTION OF CONSISTENCY

INTEXT QUESTIONS 2.5

2.8 CONVENTION OF MATERIALITY

INTEXT QUESTIONS 2.6

2.9 CONVENTION OF CONSERVATISM

The following point highlight the significance of convention of conservatism

INTEXT QUESTIONS 2.7

WHAT YOU HAVE LEARNT

ANSWER TO INTEXT QUESTIONS

2.6 i) Materiality ii) Different Accounting Heads

2.7 I. i) ` 20,000 ii) ` 21,000 iii) yes

ACTIVITY FOR YOU

ACCOUNTING TERMS Notes

INTEXT QUESTIONS 3.1

INTEXT QUESTIONS 3.2

WHAT YOU HAVE LEARNT

ANSWER TO INTEXT QUESTIONS

Journal and Other Subsidiary Books

Lesson 4 : Accounting Equation

2,50,000 = 1,70,000 + 20,000 + 60,000

Notes Assets = Capital + Liabilities or A=C+L

He paid Shweta `50,000

Accounting equation is thus, affected by every business transaction. Any increase

INTEXT QUESTIONS 4.1

Goods purchased is an asset and in return cash paid is also an asset.

New Equation 4,28,000 + 50,000 + 35,000 + 20,000 = 4,93,000 + 40,000

Notes New Equation 4,08,000 + 50,000 + 35,000 + 20,000 = 4,93,000 + 20,000

1. Started business 2,00,000 + 1,20,000 + 80,000 + 0 + 0 = 0 + 0 + 4,00,000

New Equation 1,24,000 + 1,66,000 + 80,000 + 0 + 0 = 0 + 0 + 3,70,000

INTEXT QUESTIONS 4.2

WHAT YOU HAVE LEARNT

ANSWER TO INTEXT QUESTIONS

DOUBLE ENTRY SYSTEM Notes

As stated earlier, in accounting, transactions are recorded in a systematic manner.

INTEXT QUESTIONS 5.1

Traditional Concept Modern Concept